Watching the Indicators

We have entered a period in which the only way the stock market is likely to move is sideways. The S&P crossed the 1400 mark back on August 7, closing that day at 1401.35. In the next four weeks, the index never managed to crawl above 1420, or sink lower than 1400. The biggest single-day gain was 10 points; the biggest single-day loss was 11 points. Maybe the most emblematic day was August 20, when the market opened at 1418.16, and closed at 1418.13. That’s a loss of .03 points, or 0.00002 percent of the market’s value.

The only thing everyone knows about this lack of direction is that it’s bound to end at some point, especially now that the low-volume summertime trading days are coming to an end. But which way will it go? There are a multitude of indicators for sophisticated investors to follow — and they’re pretty much evenly split between bullishness and bearishness.

Here’s a roundup of what some of the most popular indicators have been saying over the past few weeks:

Yardeni’s Fundamental Stock Market Indicator: Bearish. From veteran stock watcher Dr. Ed Yardeni, this indicator examines such macroeconomic trends as unemployment claims. It was down to its yearly low by the middle of August, signaling bearish sentiment.

The S&P 500 Put/Call Ratio: Bullish. This ratio looks at the number of puts (options to sell a stock) versus the number of calls (options to buy). The higher the number of puts, the more buyers there are, but that is a signal for this contrarian indicator that the market is likely to drop. The Put/Call Ratio was at 2 toward the beginning of June, but spent most of August around 1.35. As it falls, the bullishness rises.

Rydex Asset Ratio: Bearish. Here’s another contrarian indicator that looks at the ratio of money in bearish mutual funds to the money in bullish mutual funds — then concludes that investors are wrong. It was recently at the highest ratio of bullish money since 2000, meaning it thinks the market is due to drop.

The Farrell Sentiment Study and Market Indicator: Growing Bullish. This looks at the investor sentiment index as measured by the weekly American Association of Individual Investors survey, and then takes a ten-week moving average. As of the beginning of September, it was moving into “buy” territory.

Industrials/Transportation Ratio: Bearish. When the Dow Jones Industrial Average rises in value when measured against the Dow Jones Transport Index, the weakness of the transportation sector is supposed to reverberate throughout the entire economy. The transportation index has been lagging the industrial index lately, which to some indicates that the economy is headed for a slowdown.

The Equity-Only Put/Call Standard Ratio: Bullish