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Equity Pullback: Garden Variety or Long Term? (5 Data Points to Watch)

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U.S. equities are experiencing their first pullback of any substance in 2024 after a hotter-than-expected Consumer Price Index (CPI/Inflation) reading. Below are five reasons the pullback is likely to be a short-lived “garden variety” correction, including:

Put-to-Call Ratio Spikes

The put-to-call ratio is a tool used by Wall Street traders to gauge options activity. Typically, analysts look for extremes and fade the crowd in a contrarian manner. A spike in call buying volume suggests that investors are too optimistic, while a spike in put buying implies that market participants are too pessimistic.

X (formerly Twitter) user Jason Goepfert (@jasongoepfert) observed yesterday that the Dow Jones Industrial Average ((DIA - Free Report) ) experienced one of its highest put-to-call readings in a decade. Despite the relatively mild correction in equities, investors are fearful and are rushing to protect their portfolios.

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Image Source: Jaso

However, the put-to-call ratio is not only signaling a short-term rush to protection, it’s also triggering a signal that has historically led to bull market trends. Seth Golden (@SethCL) explains that the “1-yr moving average of Put/Call Ratio (bottom panel) turned lower in April of 2023. History suggests the trend should continue through year-end, providing a favorable backdrop for equities (top panel), within a lower-volatility regime.”

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CNN Fear & Greed

Another sign that investors have one foot out the door and are tepidly investing is the CNN Fear & Greed Indicator. Fear/Greed combines seven market indicators into a composite sentiment indicator ranging from “Extreme Greed.” Sentiment has plunged from “Greed” to “Neutral” (the most bearish reading since November) despite the relatively subdued, inflation-induced retreat in equities this week.

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Image Source: CNN

Price Action: Innocent Until Proven Guilty

When it comes to investing, I am a firm believer in trusting the trend until proven otherwise (that’s because trends often persist longer than most anticipate). As Ryan Detrick of Carson Investment Research proclaims, “2024 is the Rocky Balboa market. When the S&P 500 falls 0.75% or more, the next day is bouncing back more than anytime in history. Yes, long way to go in 24’ but really shows the resilience so far in 24’.”

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Image Source: Ryan Detrick, Carson Investment Research

Key Moving Averages Contain Trend

In bull markets, investors should buy pullbacks to key moving averages until their hands get caught in the proverbial “cookie jar.” The Nasdaq 100 ETF ((QQQ - Free Report) ) and the S&P 500 Index ((SPY - Free Report) ) are each testing their rising 10-week moving averages for the first time in 2024 – a level likely to find buyers.

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Image Source: TradingView

Net New Highs Show Bulls Remain in Control

The number of stocks making net new highs has overwhelmed the number of stocks making net new lows – a hallmark of a healthy bull market. Equities are unlikely to unravel unless this trend breaks.

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