Stock Market Analysis

Sunday, May 02, 2010

Heavy Weight Week Ahead...

The Dow ditched by 158 points last Friday as GDP turned out lower than consensus at a fair 3.2%.

In all fairness, the GDP number last Friday was well within consensus range with some pretty exciting recovery in some specific components. However, investors simply needed an excuse to sell out of the over-extended market like I mentioned last week. Once again we have bond traders rushing back into bond, depressing bond yields across the board and options traders rushing for put options, bringing the total equities put call ratio above par (see Put Call Ratio Chart).

The interesting thing is this surge in the put call ratio to 1.06 last Friday. This number shows that put options are now more heavily traded than call options, which is not a common occurance in a primary bull market. We saw a lot of it in the primary bear market back in 2008 but only a few times in January, February and March this year. Every single time put call ratio exceeds 1 this year, the market turned around on the extreme pessimism and then headed for new highs almost the very next day. Indeed, such surges against the primary trend usually depicts panic which usually reverses itself the very next day, as such, I would expect this week to be a week of struggle at the 11,000 level with the Dow recovering some lost ground on Monday.

This is going to be a heavy weight week with the ISM index on Monday and Jobs report on Friday. These numbers should produce lots of volatility in the market this week as news battle sentiment in this strong resistance zone.

For now, the Dow remains to a short term neutral trend within an intermediate and primary bull trend.


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