The stock market is off to a shaky start in 2022, a sell-off that accelerated over the past trading week. The Nasdaq composite, which tracks some of the largest technology companies in the world, is down nearly 12 percent year-to-date.
Even more worrisome are daunting technical indicators that point to more pain coming. Helene Meisler, a popular voice on FinTwit, pointed out that the put-to-call ratio could close at its highest point since May 2020. This ratio shows how many put contracts are being placed versus call option contracts.
Why Put-To-Call Ratio Matters
In short, a put-to-call ratio shows that option traders are more bearish than bullish.
Since 2019, options trading has grown tremendously, and because of that, the options market has more of an impact on overall price movement than it used to. So, if option traders are at large bearish, that could have a negative impact on equity prices.
Another technical indicator that was pointed out on Friday, was the 200-day moving average of the S&P 500. The SPDR S&P 500 ETF Trust traded below its 200-day moving average for the first time since June 2020.
A stock dipping below its 200-day moving average is a very bearish sign for most technical traders. The 200-day moving average tracks the average price of a stock throughout the last 200 trading days. Once a stock dips below that moving average, it’s a sign of weakness and oftentimes a sign that the stock has even further to drop.
Of course, this doesn’t mean that the indicators will always be bearish for the S&P 500. Instead, the moving average is showing a trend, and once that trend reverses, look for the S&P to come back to its 200-day moving average, and even break through it when we are back in more bullish times.
By Aaron Bry
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