Sep 2, 2011

Market Sentiment Review

Recent days all sentiment indicators show oversold markets. There is large level of uncertainty and thus high volatility still shaking markets. Recent rally gave some relief and question is whether it is going to last for a while. Weekly review of the sentiment indicators shows short term market mood and could give us clue for next one. The charts analysed below plot specified indicator on left hand axis and SandP500 index value on right hand.

Total put/call ratio is at one year high. This is bullish signal since the measure is above its +2SD (standard deviation). As seen in mid June extreme levels indicate market bottoms. According to put/call ratio we should be in such at the moment.
Put/Call ratio

After reaching two year peak volatility index started declining. Now at level of 32 markets calculate high possibility of double dip. Levels above 30 are crucial for market confidence, since investors perceive higher volatility with downturn.
Volatility Index

S&P500 relative to its 200 day moving average indicates the spread between mentioned. It is straightforward measure and is positively correlated with actual index move. It shows deviation of the market from its long term trend. On the chart is visible that currently market is 6% under its 200 MA and indicator is under -2SD – extreme negative value signalling oversold market.  
S&P 500 Relative to Its 200-Day Moving Average

Charts source:

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