Supply and Demand
When you get down to brass tacks, asset prices are governed by supply and demand. In the markets, the conviction of buyers relative to the conviction of sellers also plays a major role. Therefore, “I am confident” vs. “I am nervous” ratios can help us monitor and manage investment risk. What is the market telling us now?
Confident vs. Nervous
One confident vs. nervous ratio, the S&P 500 relative to the VIX, is shown below. When the ratio was pushed back at resistance (see point A), weakness in stocks followed (bottom of chart). Conversely, when the ratio cleared resistance (point B), good things happened in the stock market. Last Friday (before the FED), the ratio was revisiting the horizontal blue line, meaning it was at a possible inflection point (see point C).
Support Is Holding In Bullish Manner
As of Thursday, September 18, the ratio was bouncing in favor of the economic and stock market bulls. When the ratio is above the blue horizontal lines, bullish odds are more favorable. Our concerns would increase if support is broken near point C. On a weekly chart, Friday’s close is much more important than Thursday’s. Therefore, we will be monitoring the look of the chart over the next few days.
Investment Implications – The Weight of the Evidence
On September 16, we asked is a big move coming soon in stocks? Subsequently, the S&P 500 cleared short-term resistance, which improved the odds of a rally taking place this week. The evidence, including the S&P-to-VIX ratio, has improved this week. With an improving risk-reward profile, our market model called for a chess move on September 18 (see tweet below).
The S&P 500 is up 25 points this week as of Thursday’s close. Friday brings a very light economic calendar. If the improvement in the evidence holds into the weekend, our model will most likely call for another “add” to the equity side of our portfolios. We will head into Friday’s session with an open and flexible mind.
