Traders Focus On Stock Market Internal Signals
Heading into the central bank rate hike announcement today stock market participants were wound up tighter than a watch spring.
Good news is that the Federal Open Market Committee (FOMC) only raised the federal funds interest rate by 25 basis points. This is less than half of what was expected just a few weeks ago – before banks started failing across the world.
Bad news is the stock market came unwound after the announcement – the Dow dropped 530 points into the close – despite indications that the central bank is now planning to limit further rate hikes.
Such tension between the news and stock market participants has team members at Simpler Trading doing what they do well – turn to technical analysis to reveal what the market is really showing.
Best news may be uptick on market horizon
The best news after stock market action today is that a more upbeat direction may be on the horizon.
Traders need to understand the relationship between stock market participants and stock market momentum.
Participants chase news while traders track market momentum.
John Carter, Founder of Simpler Trading, works to avoid the enticement of news and media. He instead relies on internal market signals that many stock market participants overlook.
“The news right now is ugly,” John said. “That has little to nothing to do with the market action.”
A bold statement, indeed, but one based on decades of tracking market momentum through good and bad times across the trading world.
John has been watching closely the put/call ratio, the “fear” index, and long-term bonds.
The put/call ratio divides the total traded put options by the number of total traded call options for an index or individual stock. The put/call ratio helps measure market sentiment, i.e. whether traders are buying more call options in a bullish trend or buying more put calls in a bearish trend.
The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) tracks fear among stock market participants. Readings above 20 are considered high volatility and above 30 extreme volatility for the stock market. The VIX jumped by 3.79% on Wednesday, pushing back above 20.
The iShares 20+ Year Treasury Bond ETF (TLT) is considered an indicator of long-term investing volatility across the stock market.
Pro trader looks at bonds for market direction
Despite central bank actions today, John is seeing positive signs on the horizon in the stock market.
The put/call ratio – which is a swing indicator – is leaning toward a healthy bounce ahead.
The VIX, John said, has been in trend line for about a year. Each time the VIX spiked to 35 the market went sharply lower. But since October the VIX hasn’t shown any scary high numbers, except up to about 30 at one point this year.
John is also keeping an eye on the bond markets, specifically TLT.
“Bond markets are the smartest markets in the world,” John said.
He pointed out that when bonds are moving down, this is forward looking toward higher inflation (which occurred last year). When bonds bounce, that is forward looking to inflation weakening. Bonds have been moving higher.
Going into the central bank meeting Wednesday, stock market participants were focused on potentially dire outcomes. The market did gap down, but it hasn’t hit rock bottom.
“A lot of people are expecting the end of the world,” John said. “When the end of the world doesn’t happen, not only are they going to be disappointed, they are going to get hurt financially.”
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