Outlook for the Week
While market participants remain cautious toward the market, we’re seeing some signs of bullish sentiment that show the recent rally has likely entered a stage of acceptance. Such a stage normally signals that a long-term run for stocks may be growing tired. Why? The rationale is fairly simple, and is wrapped up in the commonly heard phrase, “stocks climb a wall of worry.” The wall appears to be getting shorter, as formerly fearful investors caught on the sidelines during the rally are trickling into the market. People are putting their “sideline money” to work, there is less and less of what the market needs (assets) to continue to climb.
Another sign of growing optimism comes from the past week of activity in the options market. The recent trend in the CBOE equity put/call ratio has dropped quickly ?the ratio’s one-month moving average is currently 0.63, down from 0.67 just two weeks ago. The ratio’s sudden drop indicates that options traders have been favoring calls (bullish bets) over puts (bearish bets) of late as money continues to flow back into the market. Falling in line with the VIX, this trend will continue to lure more call buyers into the market, but not without a cost. When the market begins to soften, these investors will begin to sell stocks and/or purchase more puts, causing the trend in stocks and the equity put/call ratio to reverse. When that happens, one must watch the market with a cautious eye.
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