Weak Breadth and High Volatility Providing a Poor Environment for New Trades | Put Call Ratio Low

Summary

In this deep-dive analysis by Braavos Research, the spotlight is on the current stock market landscape marked by weak breadth and high volatility. Despite strong S&P 500 price actions, underlying challenges like low broader market participation and a high VIX point to a need for cautious trading. With the put-call ratio at a low, there's a focus on maintaining disciplined risk management to avoid turning winning trades into losses. The video advocates for patience and strategy, emphasizing careful market entry in unpredictable conditions.

Highlights

• Despite strong S&P 500 rises, only 42% of stocks are above their 200-day moving average. 📊
• The VIX remains above 22, signaling continued market volatility and cautious trading. 🌀
• Low put-call ratios align with potential market peaks, mirroring past cycles. 📈
• Market participation needs improvement before increasing active trades. 🏦
• Risk management involves securing gains without succumbing to market swings. 💡

Key Takeaways

• The stock market shows strong S&P 500 price actions but weak broader participation. 📉
• High volatility and a significant VIX level indicate caution, not aggression, in trading. ⚠️
• Low put-call ratios may signal market peaks—watch for historical patterns and learnings. 🔄
• Strategic risk management is essential; don't let winning trades turn into losses. 🎯
• Patience and precision are key; prioritize steady gains over volatile jumps. 🕰️

Overview

In this engaging update from Braavos Research, Peter dives into the current stock market conditions where strength signs on the S&P 500's surface mask underlying weaknesses in participation. Despite strong price actions, the participation of broader market elements, such as stocks above their 200-day moving average, remains subdued, with only 42% currently rising above this benchmark. The market's high volatility further deters aggressive trading positions, prompting a cautious approach from seasoned investors like Peter.

The video highlights the importance of market indicators such as the put-call ratio and the VIX. Peter explains how low put-call ratios can signal impending peaks, while observing the VIX, which is currently above the crucial support level of 22, suggests a careful stance towards new trades. There's a correlation between these signals and past market behaviors, with historical peaks often foreshadowed by rising volatility indices.

Amidst these cautionary tales, Peter also shares the tactical adjustments Braavos Research is making in current volatile conditions. While acknowledging recent profits in trades like NRG, SFM, and ADMA, Peter stresses the importance of not transforming winning trades into losses amidst volatile swings. He underscores a disciplined approach that balances potential gains with prudent risk management, embodying a strategy that prioritizes steady returns over speculative angst.

Chapters

• 00:00 - 00:30: Introduction to Weak Market Breadth and High Volatility In this chapter titled 'Introduction to Weak Market Breadth and High Volatility,' host Peter from Braavos Research discusses the current state of the stock market. Despite strong price action on the S&P 500, market breadth is weak, meaning that not many stocks are participating in the market's upward movement. Peter notes the presence of high volatility, as indicated by the VIX index nearing high-level support, which is why their trading activity has been cautious recently.
• 00:30 - 01:30: Low Put Call Ratio Implications This chapter discusses the implications of a low put-call ratio, which is often linked with local market peaks. The need for caution is emphasized, suggesting that it is vital to avoid greed and making large bets in high-volatility markets to prevent significant losses. The tone is cautious, but not overly bearish.
• 01:30 - 02:30: Market Strength and Historical Comparisons In this chapter, the focus is on acknowledging the strength exhibited by the market recently. It discusses the robust price action observed, despite the lack of significant market participation. Highlighting a notable 9-day rate of change that reaches up to 10%, the chapter draws historical comparisons, pointing out that such market strength hasn't been seen since significant events like the COVID recovery rally and a similar occurrence in 2019.
• 02:30 - 03:30: Contrarian Investor Sentiment and Market Performance The chapter discusses the concept of contrarian investor sentiment and its relation to market performance. It highlights examples from past market bottoms, such as those in 2011 and 2008, as well as a V-shaped recovery in 2019. The chapter emphasizes that while a similar V-shaped recovery might not be the most probable outcome in the present, certain types of market strength are typically observed around market bottoms, suggesting potential signals of recovery.
• 03:30 - 04:30: Macro Economic Conditions and Impact on Stocks The chapter discusses the macroeconomic conditions that impact stock markets, illustrating that current market indicators show unusual strength compared to previous bear markets like those in 2008, 2022, or during the COVID crash. Despite this positive indicator, investor sentiment remains predominantly bearish as evidenced by the low AI bull ratio, which is at its lowest since the bottom of the bear market in 2022.
• 04:30 - 05:30: Importance of Market Breadth in Trade Decisions In conditions where the majority are bearish, markets often perform better than expected. This is based on the theory of buying when others are fearful. When bad news is widely known, it is already factored into the market prices. Therefore, in the absence of additional negative news, market improvements are possible.
• 05:30 - 06:30: Analyzing Stock Market Breadth The chapter discusses the stock market's recovery in response to extreme fear and trade negotiations. It explains that despite fearful readings, this wasn't a catastrophic environment, leading investors to re-enter the market, driving it higher. The author highlights the influence of pauses in negative sentiment and ongoing trade negotiations, which have supported stocks rallying back to their moving averages. Overall, the chapter emphasizes the importance of recognizing positive trends amid market uncertainty.
• 06:30 - 07:30: Put Call Ratio and Implications for Market Peaks The chapter discusses the implications of a weak dollar environment, low oil prices, and decreasing inflation on market trends. It highlights that these factors are generally bullish for the market. Additionally, the chapter notes that the Federal Reserve's interest rate cuts over the past year and a half are typically stimulative for the market. However, the overall optimistic market outlook depends on the assumption that a recession does not occur within the next six months.
• 07:30 - 09:30: VIX Analysis and Market Implications The chapter discusses the bullish macroeconomic conditions that support the continuous rise of stocks, despite prevalent bearish sentiment. It emphasizes the value of having a well-defined strategy for market participation, as the speakers express caution against impulsively re-entering the market too aggressively, despite having a positive outlook on market trends. They stress the importance of adhering to trading rules to maintain successful investment strategies, based on past experiences.
• 09:30 - 11:30: Strategic Adjustments in Trades In the chapter titled 'Strategic Adjustments in Trades,' the focus is on maintaining a disciplined and consistent approach to trading in order to avoid the pitfalls of greed and fear, aiming for steady returns. Key strategies highlighted include monitoring market breadth, specifically the number of stocks above the 200-day moving average on the S&P 500, as a metric for market health. Furthermore, when initiating trades, an important criterion is ensuring that the stock being considered is also above its 200-day moving average, aligning decision-making with overarching market trends.
• 11:30 - 13:30: Trade Performance Highlights The chapter titled 'Trade Performance Highlights' discusses strategies for entering stocks that show an upward trend, particularly during a bull market as experienced from November 2023 to December 2024. It highlights the favorable conditions of this period with a high percentage of stocks trending higher (over 60%), low volatility, and successful breakouts, making it an optimal time for increased market exposure.
• 13:30 - 15:30: Volatility Impact on Trading Strategy The chapter titled 'Volatility Impact on Trading Strategy' discusses how market volatility influences trading strategies, particularly in relation to breakouts and stock performance. It highlights the historical context of strong bull markets, such as the one between August 2020 and January 2022, where breakouts led to substantial gains with a high success rate. Currently, the market is in a situation where only 42% of the stocks in the S&P 500 are above their 200-day moving average, suggesting a bearish sentiment despite recent market strength. This marks a departure from the more favorable conditions seen in past bull markets.
• 15:30 - 16:30: Caution Signals from High Yield Bonds The chapter 'Caution Signals from High Yield Bonds' discusses the current market strength and the muted response in market breadth. It explains that while the market is strong, it doesn't assure future trends. The chapter compares this situation to previous V-shaped recoveries in 2019 and 2020, where market breadth significantly increased to 55-56% during rallies. However, the current conditions show a less pronounced increase in market breadth.
• 16:30 - 17:30: Closing Remarks and Viewer Engagement This chapter discusses market trends and rallies, drawing comparisons between different periods. The speaker notes a muted atmosphere similar to the rally of August 2022, where despite a strong upward movement in stocks, overall participation was lacking as many stocks were still trending lower. This contrasts with the rally in November 2022.

Weak Breadth and High Volatility Providing a Poor Environment for New Trades | Put Call Ratio Low Transcription

• 00:00 - 00:30 Hello and welcome back to Braavos Research. This is your host Peter. In this video, we're going to be looking at the stock market breadth that remains quite weak despite the very strong price action on the S&P 500. Underneath the surface, the participation remains quite weak. We've talked about that in recent videos, but we're going to look at that in this video again. And along with the high volatility, the VIX right now that's closing in on support at high levels. It explains why we've been staying away from adding too many trades right now. At the same time, we have a
• 00:30 - 01:00 low put call ratio that is often associated with local peaks. We've also discussed that this week already, but I think it's important to come back to it. Keep this in mind when we're making our decisions. It's in these kinds of environments where we've learned not to be greedy. Yes, a lot of ground is being covered by the main indices, but we don't need to be making huge bets on the market in these extremely volatile conditions. That's how a lot of people get completely wiped out. Now, I don't want to be coming out as overly bearish
• 01:00 - 01:30 in this video. It's very important that we acknowledge the market strength that we've had here. This is also something that we've talked about quite a few times now is the very strong price action that we're seeing although it's not necessarily being accompanied by a huge participation as we're going to see but this type of strength a 9-day rate of change that goes up to 10% this is something that we haven't seen since co which happened at the very beginning of the rally in this V-shaped recovery same thing in 2019 that was the time before
• 01:30 - 02:00 that was in 2019 during this V-shaped recovery now there's no guarantee that we see a V-shaped recovery. In fact, we don't think that's the highest probability scenario, but this type of strength right here does typically occur around market bottoms. We also saw this, for example, in the 2011 bottom right here and at around the 2008 bottom, a bunch of these signals in the bottoming process, we'll call it right here. We
• 02:00 - 02:30 didn't see any of these readings at the beginning of the bare market in 2008. We didn't see any of these readings during the bare market in 2022 or heading into the COVID crash. So this type of strength is good news. And at the same time, we have a overall investor sentiment that is very very bearish. Most investors right now are bearish on the market. We can see that from the AI bull ratio that's been hovering around the lowest levels since really the bottom of the bare market in 2022. And
• 02:30 - 03:00 it's in these kind of conditions where most people are bearish that you tend to see the market perform much better than expected. The theory behind this buy when others are fearful type of mentality is that if everybody's already bearish based on a certain set of bad news that are happening, it means everybody is aware of that bad news. And so a lot of that bad news has already been priced in. And so without more bad news coming into the market, it's more likely that things will actually get better and that these bearish investors
• 03:00 - 03:30 will end up getting back into the market and pushing it higher. And so that's what's been happening here as you hit these extremely fearful readings in an environment where really it wasn't the end of the world. Well, first of all, you had this bounce back as a result of the pause and the beginning of trade negotiations, but we knew that trade negotiations would happen and but that environment has allowed stocks to rally all the way back to their moving averages. So, I want to make sure that I'm highlighting these positives before
• 03:30 - 04:00 we get into this video because the strength along with the weak dollar environment that we have right now, the low oil environment that we have with inflationary numbers really coming down overall and continuing to move down steadily, which is generally bullish development for markets along with the Federal Reserve that has been cutting interest rates over the last year and a half. Typically, that's stimulative. So all of these things do, assuming that we don't get a recession over the next six months, assuming that doesn't happen,
• 04:00 - 04:30 all of these things provide a very bullish macro backdrop for stocks to continue moving higher despite all of this bearish sentiment. So now that we have that background and that context out of the way, let me show you why we're not jumping in back with both feet. Because while we do tend to have an opinion on where the market is going, we also have rules regarding how we allocate, how we initiate trades. And those rules have helped us many, many times in the past to stay on the right
• 04:30 - 05:00 track, not to get overly greedy, not to get overly fearful, and to keep a very consistent approach to make sure that we're yielding steady returns. One of the things that we want to see is an improvement in market breadth. This is the number of stocks above the 200day moving average on the S&P 500. And one of the things that we really want to see for trades that we initiate is we want to see the stock that we're entering above its 200 day moving average. So in
• 05:00 - 05:30 other words, we enter stocks that are trending up. And so in a bull market like we had in December 23, even you could say from starting really from November 2023 all the way until December of 24, you had a really a bull market environment where most stocks over 60% of stocks were trending higher. This was a perfect environment to really have a complete exposure to markets because you had very low volatility. Breakouts were very successful and you could expect
• 05:30 - 06:00 those breakouts to lead to substantial upside with a pretty high success rate over a relatively reasonable amount of time. Same thing was the case between about August of 2020 and January of 2022. Very very strong bull market type of environment. Today we have the number of stocks above their 200 day moving average at 42%. So less than half of stocks in the S&P are trading above their 200 day moving average, which is a little bit disappointing given the strength that we've had recently. Let me add the S&P 500. You can see we've had a
• 06:00 - 06:30 very strong market here, but the bounce on the breadth has been relatively muted. So this doesn't really tell us or guarantee us anything about the future or the next move of the market. But when you look at, for example, both of the V-shaped recoveries in 2019 and in 2020, you did have breadth, stock market breadth that jumped up to 55 56% during these rallies. So far, it's
• 06:30 - 07:00 been a little bit muted right here. What it reminds me more of is this rally, for example, in August of 2022 where you had a very, very strong rally. This was a monstrous move up in stocks from June of 22 to August of 22. Lots of optimism, but the participation just wasn't really there yet. Most stocks on a 200 day basis were still trending lower. When you compare that, for example, to this rally in November of 22, look at the
• 07:00 - 07:30 difference. You have a lower high relative to August of 22. So the market itself was trending lower, but when you look at the breadth, it was trending higher. you made a higher high in the breadth. So more stocks were actually participating and moving higher and breaking above their 200 day moving average and trending higher on this move. This was telling you this was a positive signal. More breakouts were successful. There were more trades actually playing out in this kind of environment. So there's two options from here. either we're going to see a big
• 07:30 - 08:00 improvement in the breadth as stocks continue a kind of V-shaped recovery here and you see the S&P 500 really slice through all its key moving averages and that's confirmed by a big move up in the breadth taking the number of stocks above their 200 day moving average at the very least back above 50% with over half of stocks above their 200 day moving average really showing you broad participation in this rally or you're going to see this rally fail and then maybe the the next one is going to
• 08:00 - 08:30 see a better participation a little bit like what we saw right here in late 2022. But in either case, it's only when we have strong breadth that we're really going to get more confident in adding more stocks to our list of active trades. It's how our trading strategy works. In addition to this, you also have things like the put call ratio that we talked about this week already, but I do want to stress on this point a little bit more in this video. So this is the put call ratio for stocks and indices,
• 08:30 - 09:00 meaning the number of puts versus the number of calls that are being placed on the market. So number of people betting short versus betting long. It's a 9-day moving average to smoothen out the readings of the put call ratio that can be a little bit volatile. And the idea is that every time you get a low put call ratio, it tends to coincide with some kind of short-term peak in the market. Especially when you get into this zone of about 0.85, 85. You had that kind of peak in July of 23. You had
• 09:00 - 09:30 a peak like that in July of 24. You had a low put call ratio right here in January before this correction that was mainly Fed induced. This one right here and then another one right there right before the big crash that we had in 25. Now elevated put call ratios are generally bullish. So when you have a very elevated put call ratio like all of these instances right here, that's typically the moment where you want to be going long on the market or buying
• 09:30 - 10:00 stocks for the long term, those are really often great buy the dip opportunities. We had one of those signals right here during the correction. But since this rally has begun, we've seen the put call ratio come all the way back down to pretty greedy levels where local tops are typically printed. So, we're a little bit cautious as well because of that. We've come a long way from this bottom. And it could be that well, a lot of good news has already been priced in. So, a
• 10:00 - 10:30 lot of positive news regarding, for example, trade negotiations have been priced into the market here. and that if things begin to deteriorate a little bit, whether that's from the recession standpoint or the risk on the Treasury bond market that we've highlighted a few times, that can lead to volatility, not necessarily an outright collapse, but some volatility. This was also a point that I wanted to make. This is the VIX. The VIX is still above 20. In fact, it's at 22 right now, and it's coming in to
• 10:30 - 11:00 test a trend line support right here. I found the VIX to respect simple uptrend lines many times before. There's many examples that I can show you of the VIX basically just bouncing up along a very basic uptrend line like this one from 2017 2019 21 and briefly in 23. This is technical analysis on the VIX is often controversial because it's not a price index. You can't actually physically buy
• 11:00 - 11:30 the VIX index. You can bet on the VIX index, but you can't buy it. But nonetheless, you do have people paying attention to the VIX when it comes to the way they bet on the S&P 500. And so, the behavior of the VIX does have an impact on the S&P 500. And this pretty basic trend line support could be an area for the VIX to kind of pick back up briefly after this significant decline in volatility that you could see maybe a little bit of a retracement before you
• 11:30 - 12:00 actually really see volatility cool down. But the point is not only are we coming at maybe a level of support whether you're looking at this trend line support or by the way this zone of support right here. This is pretty significant support. this 22 level that was really broken out of on this move up in volatility that we're kind of retesting. Wouldn't be a surprise to see a little bit of a bounce before breaking down. Maybe a little bit like what was happening for example right here in
• 12:00 - 12:30 2020. We had a big breakout above this zone. This is the very same zone by the way in 2020. The VIX came back down twice to this zone. Once in June of 2020 and once in August of 2020. Both of those times, the VIX made a brief bounce off of that level. And what does the VIX bouncing mean for the S&P 500? It means a little bit of a spike in volatility. In both of these in both of these instances, the S&P 500 saw a small retracement. Again, I want to be clear.
• 12:30 - 13:00 We're not necessarily betting on this, but we're very conscious that this is a risk. Yes, our job is to pick out trades that can win and give us a return, but our job is also to make sure that we're protected against downside risk. So, every day we're making a conscious decision not to be going more aggressively into this market, not to be adding more trades, not to be initiating long trades on semiconductors, on Nvidia, on Palunteer, on, you know, there's lots of stocks that are
• 13:00 - 13:30 performing quite well right now. Although it might be a little bit frustrating to some to miss out on some of those gains, that's something to know about the service is that we're absolutely ready to miss out on gains if we feel like there is a risk in this market. And today with the VIX 22, I do think there's definitely a risk. Now, in regards to the changes that we made to our trades this week, we booked additional profits on our trade on NRG that we initiated upon the breakout right here. It's had a solid
• 13:30 - 14:00 performance. It's moving down a little bit right now. Completely normal to see a bit of a retracement here. We also closed our positions on SFM that plummeted back down below this trend line here hitting our stop loss that we had raised from our initial stop-loss that was much lower. This exit was in profit. I believe we exited the rest of the position because we had put profits on it. The rest of the position at about 2.5% profit. Not huge, but this is a
• 14:00 - 14:30 very important principle for us is that we do not let winning trades turn into losers. SFM was a winning trade. We let it run. We did expect it to move higher than it did, which is why we didn't book more profits. But ultimately, it went against us. And when a trade begins to go against you, you don't wait until it collapses and takes you back into a loss before cutting your exposure. You want to make sure that on trades that are winning that are up, you're putting in place measures to make sure that they
• 14:30 - 15:00 don't turn into a loss. That will significantly increase the rate of success if you do that on your trades. The same thing is true for ADMA. We also booked some profits right here. Again, you know, we expected this trade to go further because you had a really nice setup of about a 34% head and shoulder pattern right here that looked like it was ready to break out. 34% move up. Could have taken the stock all the way up to $28. That's probably where we
• 15:00 - 15:30 would have booked big chunk of the rest of the position had it reached that. But again, it the stock went against us. It broke the technical structure that was in place and instead of waiting for this to go into a loss, we're taking out the rest of the position. I believe at a 10% gain. So, still a pretty solid trade. The reason I'm highlighting ADMA and SFM is to show you the volatility that we have in today's market with the VIX at 22. This isn't just talking about the S&P 500 that it's measuring the S&P 500.
• 15:30 - 16:00 Yes. But it tells you that there's a huge amount of volatility on the average stock right now. And that's what we're feeling with these kinds of trades on ADMA and on SFM that are basically being whipsaw. Instead of having very steady uptrends like this, we have very very little volatility. But that was when the VIX was much much lower than today. Right? The VIX in this environment was very very low. So, you had plenty of stocks that were just grinding up, breaking out of beautiful patterns and
• 16:00 - 16:30 yielding incredible returns. And in this environment, yes, you have some trades that are playing out, and that's why we're adding some here and there, but you're a lot more susceptible to seeing whipsaws and false breakouts and just having volatility get you out of trades. Again, still more defensive than what we usually are if this was a low volatility bull market. Now the final thing that I wanted to show you in this video is one more kind of warning signal or at least a signal that we should be cautious is
• 16:30 - 17:00 the high yield bond market which is often seen to be more sensitive to risk that's beginning to make a lower high here. And this is in the context of the S&P 500 of course if we zoom in on the 4hour chart making a higher high. This is not particularly great to see when high yield bonds begin to roll over ahead of the S&P 500. It's typically not a great sign. We've seen this mark pretty important peaks in the market before and along with the low put call ratio, the market closing in on key
• 17:00 - 17:30 moving averages right now and volatility remaining quite high, participation being low, it puts a little bit extra weight onto all of the things that I highlighted in this video. So hopefully this video was helpful for you guys. If you found it helpful, make sure to click on the like button down below. That helps us understand if you guys are enjoying these videos and analysis. If you have any questions, comments, feedback, make sure to leave them in the comment section down below. I wish you all a great weekend and see you next