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#27 S2N: An Incredible Market Top & Bottom Indicator

#27 S2N: An Incredible Market Top & Bottom Indicator

micksonmatch
March 22, 2024

In today’s issue:

A great long-term SP500 indicator
How good is the put/call ratio at market timing?
A breadth of fresh air
The central bank of Switzerland shocks
Necessity is the Mother of Invention

Today’s Spotlight

I am pretty excited about the prospects of this high-quality signal indicator. Let us dive in.

I have taken the SP500 index and created a ratio with the Bloomberg Commodity Index. Unfortunately, the data only goes back to 1991, but I believe the signal is strong from before, having looked at some proxy data. The green line and right y-axis show the ratio. What is quite clear is that this ratio seems to either peak or rally just before the SP500. The ratio seems to have a really cool fit. I am not going to try and fit a narrative to why this is so; I am rather going to rely on the data.

S2N Insights

Put-Call Ratio (PCR)

If you have been following the markets for a while, you will often hear market analysts quote the put-call ratio. What the ratio is describing is the amount of put options (bearish) on the market versus the amount of call options (bullish). A ratio of 1 equals the same amount of bulls and bears. “A PCR below 0.7 is typically viewed as a strong bullish sentiment, while a PCR above 1 is typically viewed as a strong bearish sentiment,” according to Investopedia.

I have always found this indicator to be very noisy. Let me show you why. I have tried to strip some of the noise out by applying a 10-day moving average to the ratio. What you can see is that the PCR has been above 1 since 2019, and we have been making new highs through most of this time.

Let us go a little deeper and look at a longer time series. I think the PCR may lend itself to more short-term trading, but I cannot extract anything meaningful at this stage, so be wary if someone quotes this indicator with high conviction as a market timing tool.

A breadth of fresh air

I want to share an indicator that I think has some interesting qualities. The green line is a cumulative total of the difference between the number of stocks reaching new 52-week highs and the number of stocks reaching new 52-week lows. The High-Low Cumulative indicator provides broad confirmation of the current trend. I will make one comment on the chart below. The rally from the 2022 lows started with very few companies, which is when we coined the term “magnificent-seven” as just a few companies led the massive rally in the SP500, but now the green line has started steadily climbing as more companies join the party with new highs versus those experiencing new 52-week lows. This would suggest that the trend up is very much in place, but the green line will need to start climbing steadily from here to suggest the trend has breadth and the trend is strong.

The Swiss Cut

This has been a busy week for central banks. We had the BOJ raise rates for the first time since 2007, ending the negative interest rate era for the major central banks. You had the RBA, Fed, and BOE sit tight, and then you had the SNB shock the markets with a cut. The Swiss Franc dropped 1.21%, which is a pretty decent size move. For those of you new to the SNB (Swiss National Bank), it isn’t as conservative as its history suggests. In January 2015, it unexpectedly removed its peg against the Euro and caused some serious damage in the forex markets.

Necessity is the Mother of Invention

The USA has been dependent on the rest of the world’s oil supplies for many decades. To overcome this dependency, the American’s have been very innovative in the oil space. Today, they are the largest producers of oil at scale relative to oil production of the past. That is a tremendous achievement