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#204: Who is Buying the Dip?

#204: Who is Buying the Dip?

micksonmatch
December 19, 2024

S2N Spotlight

At the beginning of the month, 40% of individual investors didn’t expect a 10% drawdown within the next 6 months, near all-time high bullishness.

The other day I shared that the VIX was trading very low and the market was too complacent. I also mentioned the SKEW was trading near all-time highs, meaning that there was an expectation that a big move was possible. Look at that SKEW/VIX ratio reversal in the bottom pane.

We got the big move. The market didn’t like the fact that the Fed is taking a more hawkish approach to its easing due to inflationary fears. The VIX (a volatility index) shot up 74% yesterday, its second largest daily move in history. Not sure why my 3 and 6-month returns in the table below are 0. There must be a bug.

With regards to the bad breadth we spoke about above yesterday, it gets worse. But let us begin with some light refreshments. The number of stocks in the S&P 500 above their 50, 100, & 200-day moving averages dropped dramatically. It’s almost unheard of to be this close to an ATH and have only 18% of stocks above their 50-day.

The Advance-Decline line is now at its second longest streak of consecutive daily down days.

S2N Observations

People always speak about the fact that when the steepness of the yield curve inverts, it has a 100% track record in anticipating a recession. In the chart below, I plotted the monthly S&P 500 over the classic 10-year over the 2-year yield curve, and you can see it has also been a pretty accurate indicator of market tops.

Equity markets are going to be exceptionally exciting to watch as we brace for the Santa rally .