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The market bounced, was it enough selling or will we see more?

After Wednesday’s market selloff we finally got a bounce. This was a second bounce last week. The question is, will a momentum hold followed by a rally – a sustainable rally, or are we seeing just a relief bounce/rally and renewed selling next week? We must wait to see.

Bearish sentiment, not so bearish market

When reviewing social media, mainly YouTube, you can see posts all calling for a crash, recession, mother of all crashes, and all the creators are telling their audience how they sold out of their positions. Their thumbnails all display flames burning behind their backs, charts crashing down through the floor, scared faces, and sensational shouts about the inevitable end of the world.

But it all indicates one thing – none of these people actually understand what forces drive the market.

I do not want to sound patronizing or pretend I am a smart cookie here. I actually didn’t know myself either until about a year ago when I learned a lot of tricks on how to look at the market to determine its health. And since I started learning and watching these indicators, I started seeing discrepancies between the market’s temporary mood and its overall health. In other words, when all the Youtubers are predicting a recession while the market is selling off, I see a few indicators telling me that there is no recession coming and that the selling is most likely a temporary correction. A good opportunity to buy a few shares of good companies.

Among those few indicators, I watch is a put-call ratio. A normal level is 0.85 – 0.90. A neutral level is 1.00. Anything below that indicates bullishness, anything above that bearishness. Look below:

market put-call

The put-call ratio went up to 1.075 during this selloff. It didn’t even exceed December’s highs. And it ticked only a few tiny points above the 1.00 level. What does it tell you? It tells me that all those bears out there are either totally dumb and do not know what they are doing, or actually do not believe in what they are preaching because no one is rushing to buy puts to hedge against the imminent crash or recession. The market doesn’t expect one.

When looking at another indicator such as the VIX futures structure, I see the exact same thing. The market doesn’t expect any recession or imminent crash. At least not yet, not as of today.

And those who sold off are now sitting on a pile of cash that will proper this market higher as soon as these people start feeling the FOMO. If we have bottomed, expect a face-ripping rally.

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