In our October 22nd Research Excerpt, entitled The Put/Call Ratio: If The Market Can’t Rally Here, It’s In Trouble, we published one of the charts from our October Monthly Investment Compass (MIC, access requires subscription).
It showed that the CBOE Put/Call Ratio was hovering at a previous multi-year most bearish extreme, indicating a high ratio of put volume versus call volume, that had closely coincided with every near term bottom in the S&P 500 this year. We said:
“…unless the S&P 500 (SPX) recovers from major support near 2768 this week, the US broad market has probably changed it’s previous positive bias and is now in the early stages of a major bearish trend change — and headed significantly lower later on this quarter.”
Since then, SPX has declined by 101.00 points or 4%.
The graphic below displays Slide 16 of 30 from our latest, November 17th Monthly Investment Compass. It shows that high yield corporate bond spreads have been in a trend of monthly widening since November 9th and — if you discount just two days of narrowing on November 7th and 8th — really since October 5th.
The bond market is typically more forward-looking than the stock market. As a result, the S&P 500 has historically been unable to sustain rallies when corporate bond spreads are widening — which indicates that the bond market sees trouble ahead. Moreover, the longer the spread remains in a trend of monthly (our tactical time period) widening, the more likely the US broad market is to slip into a sustained bearish trend.
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