Stocks have gone on a wild ride since it became a reality that Donald Trump was going to win — from about 8:00 p.m. (Eastern time) Tuesday night through Wednesday. A loss of -107 S&P points (in the futures) overnight was completed recovered, and a gain of over 30 points was added. So that’s a recovery from the overnight lows of roughly 130 S&P points (about 1000 Dow points). That’s crazy. The vertical red line on the first chart below shows the action from Tuesday’s close through Wednesday’s close.
So where does this leave the technical picture? Actually, in somewhat bullish shape, but not completely.
Let’s start with the chart of the S&P 500 Index SPX, +0.36% It broke down on Nov. 1, violating multiple support at 2120. That led to a further decline to about 2085 or so through last Friday. That decline also pushed the SPX below the -4-Sigma “modified Bollinger Band” (mBB). So, this past Monday when the market rose sharply in the wake of the FBI’s decision not to prosecute Hillary Clinton, an mBB buy signal was triggered. This is somewhat similar to the post-Brexit mBB buy signal (shown as a red “B” on the chart, late last June). That was the first of several severe oversold conditions that have produced buy signals — or will do so soon.
The SPX chart itself is still a bit negative. The SPX needs to close above the declining blue downtrend line on the chart (that connects the series of lower highs that have been registered since last August), to establish a more bullish environment. After that, new highs are going to be required to keep this chart in a positive mode. The Dow Jones chart (not shown) is more constructive, as that index is nearing all-time highs already.
Equity-only put/call ratios turned bearish in mid-October. While they were arguably a bit premature, they were correct in anticipating the eventual selloff to 2085. They continue to remain on those sell signals, since put buying has been very heavy leading up to the election. Now that the election is out of the way, perhaps these will roll over to buy signals. But at this point, they show no signs of doing so.
Also, the Total put/call ratio (all stock and index options that trade) has been rising sharply, too. It is now in a very oversold state, and will generate a buy signal when it rolls over and forms a peak that lasts for 10 days. That buy signal will occur in the fairly near future, but probably not for at least a week or so.
Breadth was dreadful during the recent nine-days-in-a-row decline, and so the breadth oscillators fell into deeply oversold territory. They have just now (as of Tuesday) moved out of oversold territory while generating new buy signals. Usually, breadth buy signals that are created from deeply oversold conditions are reliable.
The wildest action has been in the volatility area. The CBOE Volatility Indices exploded to the upside — especially the Short-Term Index (VXST). In fact, they nearly all inverted, as VXST was above the VIX, while it was above VXV (the 90-day Volatility Index). That condition is bearish while it exists, but when it reverses back to the “normal” state (which is VXST < VIX < VXV), then oversold buy signals are generated. Those appear to be in the process of occurring today. These are short-term buy signals, in that their best gains usually come in the first five trading days after the signal occurs.
There was also a VIX “spike peak” buy signal, as the VIX rose sharply and then fell back. These “spike peak” buy signals are normal quite reliable, and they can last as long as a month.
A lot of crazy action is taking place. In short, our election played out in a very similar manner to Brexit: the polls showed Brits would vote to stay (or Hillary Clinton would win), and the markets had a huge rally the day before the vote. Then when the vote went the other way, stock prices plunged sharply but only for a brief period of time. Apparently, a similar vote is coming up in Italy soon.
One last point: After Reagan was elected in 1980, stock prices fell in a slow bear market for nearly two years — until August of 1982, when interest rates finally began to drop. Then, from there to the top in 1987, a huge rally took place in stocks. Don’t count out something similar now, although things happen much more quickly now than they did then.
Our indicators are turning bullish, and we will follow suit. The put/call ratios will probably be the last to acquiesce, after which it would be a very positive environment, assuming that the SPX has broken through the 2150-2160 levels as noted above.