The U.S. stock market has been struggling of late, with the S&P 500 index on track for its longest losing streak in about two years, but this weakness could simply be creating an opportunity for bargain-hungry investors, according to one analyst.
Andrew Adams, senior research associate of Raymond James, on Wednesday wrote that the amount of bearishness in the market had hit extreme levels, creating conditions that have in the past been followed by pronounced market gains.
Adams looked at the equity put/call ratio, a measure of how options investors are positioning in the stock market. When there is more trading volume in puts rather than calls, that is a sign that investors are betting on additional declines, leading to the ratio rising.
“Over the last few years, spikes higher in the Equity Put/Call ratio have done a fairly good job marking bottoms in the S&P 500, and on Friday, this indicator spiked to a level only seen four other times in the last two years. Each previous time, a bottom soon followed,” Adams wrote.
The spike in the ratio can be seen in the following chart, along with examples of times when this metric coincided with a market bottom.
“When combined with the support levels being hit in the major averages, the Put/Call ratio may be indicating now is a good time to enter positions,” Adams wrote.
Some of the support levels Adams cited are showing signs of faltering, however. The S&P 500
is on track to close below its 50-day moving average; that would be the first time the benchmark index has done so since July. The S&P has dipped under the average, a closely watched proxy for short-term momentum trends, in each of the past three sessions, though it subsequently closed above it. Separately, the Russell 2000 index
of small-capitalization shares was on track to close below its 200-day moving average — a metric of long-term momentum — since August 2017.
“A daily close beneath those support lines, though, and we’ll probably have to get a little more cautious about the near term,” Adams warned.
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