If you think traders have rewarded the market for good news every time good news has been circulated – but hasn't punished the market for bad news – you're not crazy. That's exactly what's happened. The end result is a market that's gone up and up and up without ever stumbling, in turn resulting in a situation not seen since early 2018. The indices survived a small stumble then, but never really regained a firm footing until after the big setback that would take shape later that year.
The "extreme" in question is the distance between the S&P 500 and its 200-day moving average line, which is considered the grandmother of all the moving average lines used by technical analysts. As of Thursday, the index is 10.8% above it. At its peak in January of 2018, the index was 13.8% above the 200-day line. That theoretically leaves room for more divergence, though on an absolute (point) basis, the lower value of the S&P 500 then would imply there's not a full 3.0% window for more upside… just a little more.
But, that's not the only extreme we're eyeing right now. As of Thursday, 84.2% of the S&P 500's constituents were above their 200-day line. That's just a hair more than the peak level we saw above their 200-day moving average lines in January of 2018. That's what's indicated on the upper portion of the chart below, with the S&P 500 and its 50-day and 200-day moving average lines (pink and green, respectively) on the lower half.
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And yet, that's still not the only unusual extreme to be witnessed here and now. Also as of this week, the marketwide put/call ratio trend is lower than it's been in years.
Put and call options are one-sided bets… bullish or bearish stances that are highly speculative. They're the right to buy or sell a stock (or an index, or an index's value), but not necessarily the obligation to do so. When traders are buying a lot of calls, they're very bullish… collectively speaking. When traders are buying a lot of puts, they're collectively bearish. When they're buying a lot more calls compared to the number of puts they're buying – the put/call ratio – yes, they're overwhelmingly bullish.
Care to guess what the put/call ratio looks like right now? Its 15-day moving average line, which captures the bigger trend, is at 0.679. That's lower than the put/call trend has been since the beginning of 2014.
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Superficially, that would seem bullish… and in some cases it might be. More often than not though, a put/call ratio at an extreme indicates that traders' presumptions have reached unsustainable levels. A reversal is nigh, shocking unsuspecting investors.
And, as the graphic shows, that works both ways. When the put/call figure is oddly high, the market tends to be close to a bottom. The extreme pessimism is unmerited. Our current concern is the opposite though. Right now, the oddly low put/call ratio says investors are oddly sure that the market won't go down from here, but will only go higher.
It's possible they're right. It's possible the put/call ratio reflects a level of optimism that's so great that traders have no intent of ever letting stock's slide downward… a self-fulfilling prophecy rooted in an uncanny amount of certainty that supersedes reason and common sense.
Still, where does it end? Nothing lasts forever. Even if the situation is a healthy one, the market inherently ebbs and flows. This looks, feels, and smells like a setup for a pullback… or a rally that's even more unusual than the other unusual extremes discussed above.