How a Rally Can Part the Dark Clouds on Wall Street

Note: Meisler’s next next column will be Sept. 6. Also, Meisler appeared on Bloomberg’s ‘Odd Lots’ podcast, to listen, click here.

What a difference a day makes. Or, rather, a rally. The gloom that sat over the market on Monday seems to have dissipated. Not fully, but that big dark cloud that enveloped seemingly everyone by the close on Monday has softened the stances a bit.

The chatter is now how maybe all the bad news from the Fed is priced in. My guess is that’s because beloved technology rallied and we know one thing about sentiment: Investors are always happier when tech/growth is rallying than when energy and banks are rallying.

How do I know sentiment is shifting? OK, part of it is anecdotal but the other, statistical data point, is that the ISE Call/Put Ratio was 1.4, which is one of the highest readings of the year. As a reminder this is a call/put ratio (as opposed to the CBOE’s put/call ratio) so a low reading says too many puts are being bought, while a high number indicates folks are leaning heavily toward calls.

This is in fact the second straight day that we’ve seen a high reading for this metric. Wednesday’s reading was 1.24. To put this in perspective, there was a super high (very odd) high reading at around 3.4 in the spring, but aside from that 1.4 hasn’t been seen since early to mid-January.

At the June lows this reading was .56. Even in mid-July it was .74. So it’s come a long way. I’d say it is the equivalent of the CBOE’s put/call ratio being in the .65 range.

So why hasn’t the CBOE’s put/call ratio gone down (it was .90 again on Thursday). I don’t have a solid answer for you, but I can tell you that the put/call ratio for exchange-traded funds fell under 1.0 for the first time since the lead up to the July 4 holiday, so that, too, is a change in sentiment.

One final point on sentiment. The Daily Sentiment Index (DSI) for the Volatility Index has fallen back to 18. So far, it has not breached 14 on this rally in stocks (decline in the VIX). Readings in the teens are yellow flashing lights, while single-digit readings are red lights. So should the market rally into the Labor Day weekend, this is likely to fall toward, if not into, the single-digit zone. Should it fall to single digits while I am on vacation I will send out an alert.

Aside from all of that, there was no other real change in any of the indicators as we await the news — or non-news? — out of the Fed’s Jackson Hole meeting.

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