A Laughable Market Moment

… the average did move slightly lower, but the SPX had a substantial drop instead of continuing to rally. This pushed the correlation in the positive direction and if this continues to increase like it did earlier in the year (pink ovals), then we could see further downside to the SPX as the put to call ratio continues to drop (i.e. positive correlation).

Despite the fact that we have many reasons to think that this is not the start of a bear market, the behavior of the Rydex bear:bull asset allocation ratio is starting to worry us. Each time that the nominal ratio value made a double down-spike and the 36-week MA started rising, the SPX corrected into either a bear market (2000), or into a significant local correction (2011 and 2015). That is the situation we are in now; the nominal ratio has formed a double down-spike, and the 36-month MA is starting to rise.

The possibility that the market pulls back toward the long-term trend-line is still alive, but we note that the nominal bear:bull ratio has dropped for the second week in a row. This means that bull assets are being added to portfolios. This evidence of “buying the dip” is needed in order for the market to form a bottom (chart below).

The market is likely to test 2600, but chances are good that we get a bounce from there…

Even if some of the economic indicators are starting to show marginally-slower growth, we remind you that the economy is accelerating (first derivative) and it is only the rate-of-change (second derivative) of acceleration that is slightly negative.

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