Next Week's Stock Market, Up or Down??
Equity Market: What will happen next week?
Here are some comments I just penned for my firm under the title "Things I saw today..."
Obviously last week was the worst for equity markets in some time. What does next week bring? Is it a good time to put money to work or is the decline just starting? It is very difficult to predict short term market moves, with apologies to Burton Malkiel, it truly is a random walk. As investors the best we can do is assess the facts and play the odds, what is the most likely outcome. Below I will list some recent statistics that might be predictive.
The ratio of price premium in puts versus calls for the S&P 500 is currently 1.64. This essentially matches a 5 year high. Investors are currently paying essentially 1.6 times more for puts than calls.
Puts versus Calls trading volume is 1.12 to 1. The last time it was this high was in February when the market briefly touched 2553.
This chart is of the S&P 500. The top chart is the actual price movement of the S&P over the last 5 years, the bottom chart is the RSI (Relative Strength Index).
The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30.
So you can see there that not only is the RSI below 30, it the lowest its been in 5 years.
Finally the next chart The Williams Percent Range of the S&P 500
Williams %R, also known as the Williams Percent Range, is a type of momentum indicator that moves between 0 and -100 and measures overbought and oversold levels. The Williams %R is commonly used to find entry and exit points in the market. It is, however, prone to false signals as it moves between overbought and oversold. For that reason, using the indicator alongside other price and trend methodologies can help mitigate some of the false signals.
I could pile on with more indicators but I don’t want to put you to sleep. These indications of over pessimism (put premiums and reading volume) and of an over sold market (RSI and Williams % R) lead me to believe that the odds favor a market recovery soon. At a minimum it appears to be a good time to add to one’s holdings. However please understand the market could just as easily continue its decline, all one can do is play the odds.
Steve Massocca
Wedbush, Inc.
The information contained in this presentation is not to be construed as an offer to sell or a solicitation or an offer to buy any securities or investments. The factual information herein has been obtained from sources believed to be reliable but is not guaranteed as accurate and should not be relied upon as investment advice. The purchase of securities involves a substantial risk of loss and is not suitable for all investors.