This is an abridged version of our Daily Report.

Puts have become popular

Since the market peaked in September, most days have seen at least 10% more put options traded than call options, the largest cluster in three years. Out of a total of 27 days in the sample, the S&P was higher two months later after 26 of them (there were no signals prior to 2007).

An argument could be made that all of this put activity isn’t traders panicking by buying protective put options, but rather trying to collect premium and be a little bit bullish by selling puts to open instead. Even while that’s considered a bearish contrary indicator, that’s not the way it has worked in S&P 500 options.

Sector funds struggle to beat risk-free

There isn’t a single Fidelity sector mutual fund that has managed to beat cash over the past few months.

Other times we’ve seen this, stocks generally did well over the next couple of months. That’s also true after the 20-day average of the breadth indicator drops below 10%, which it just did.

Not many up days

Per Deutsche Bank, the S&P has been up only 12 out of 39 days (since the September peak). That has led to a positive one-month forward return 71% of the time since 1928 and 90% of the time in the past 50 years.

NOTE: There will be no Lite report the week of Thanksgiving. Have a safe and joyous holiday!

This is an abridged version of our Daily Report.

Fear and loathing in junk bonds

High-yield bonds had a very bad day on Tuesday, with extremely poor breadth and sentiment.

On Tuesday alone, nearly half of all high-yield bonds declined on the day, they went from an almost even number of 52-week highs and 52-week lows, to seeing 300 more bonds at new lows than new highs, traders pulled a large amount from the popular HYG and JNK funds and that helped push the average discount on HYG and JNK past 0.5%, which is large for an ETF.

The other times it was this bad, that market typically rallied, especially outside of the financial crisis.

Energy apathy

The ratio of Energy stocks to the S&P is at a 17-year low, pushing their weight in the index under 5.5%. The few other times it was this low, the sector rallied strongly on both an absolute and relative basis. Six months later, the stocks were higher each time by an average of more than 20%, and with a 10-to-1 reward-to-risk ratio.

Oil contagion

There is concern that the collapse in crude has worrisome implications for energy stocks or the broader market. In a premium note, we looked at forward returns in the Energy sector and the S&P 500 after all the signals shown in the three studies in Tuesday’s report. Over the next two months, the Energy sector was higher 70% of the time with a 5.8% average return.

Hard to beat cash

Only one of the Fidelity Select sector mutual funds is beating a return on cash, and that fund is focused on gold. There have been 97 other days in the past 30 years when this has happened.

This is an abridged version of our Daily Report.

A crude month

Crude oil has suffered one of its most epic collapses in 30 years and is the most oversold ever. It has lost a quarter of its value from a 52-week high in only 30 days, one of the fastest drops ever. And its Relative Strength Index has declined to the lowest level ever, dating back to the inception of the futures contract in 1983.

When we look at forward performance following all similar crashes, for the most part, there was a modest suggestion that this kind of selling pressure is exhaustive.

Fear of a collapses is spreading

While sentiment on oil is dropping rapidly, “smart money” hedgers haven’t reduced short positions too aggressively, and optimism is still above washed-out levels. That should change soon, as there are starting to be some signs that fear is rising quickly. The Crude Oil VIX just spiked above 55, its highest in two years.

Golden window

On the Commodity Sentiment & Seasonality Screen, gold is showing up as having low optimism during a positive time of year. Over the past 20 years, when gold’s Optimism Index was 30 or below in November, it showed a positive return 2 and 3 months later after 32 out of 34 days.

This is an abridged version of our Daily Report.

A weak retracement

At its high point of the bounce during the past two weeks, the S&P never managed to retrace more than 61.8% of its pullback from the September peak.

It has now started to fail and fall back to the lower end of its range. While considered a technical warning sign, weaker retracements like this have led to much better returns than stronger ones that initially exceeded that 61.8% "resistance" level.

A new dollar milestone

The U.S. dollar hit a 350-day high for the first time in nearly two years on Monday, ending one of its longer streaks without this significant of a high. Other times it reached this kind of milestone, stocks did fine going forward, especially the defensive sectors, but commodities stumbled, especially gold. For the S&P 500, it showed a bit of weakness over the next couple of weeks, but that was about it. After that, its returns were mostly positive and with a decent but not great risk/reward. Six months later, the S&P was higher 84% of the time. Only 2001 and 2008 showed any meaningful weakness.

Energy crunch

The OIH Oil Services fund is the most-hated among ETFs we follow. Over the past 20 days, its Optimism Index has declined to just over 25, the 4th worst in its 5-year history. According to the Backtest Engine, there have been 10 other days when the 20-day average was this low, leading to rebounds over the next two weeks each time.

Dollar bulls

The 20-day Optimism Index on the U.S. dollar is climbing toward 70. Over the past 15 years, there have been 438 days when the average was as high as it is now.

This is an abridged version of our Daily Report.

A bear market in stocks

While the major indexes are far from a 20% decline, many S&P 500 components have declined more. At the depths of the decline in October, more than 40% of the S&P reached bear market territory.

That often served as a low point historically, but with false signals in 2001 and 2008. The biggest problem was multiple false signals in 2001, when there was a spike of more than 40% of companies falling into bear markets, then a recovery back below 30%. Soon after that, though, the S&P topped out and headed to new lows.

The only way to avoid those was to wait for an even more stringent recovery. Waiting until fewer than 15% of stocks were in a bear market was helpful.

Small-cap stumbles

One of the longest streaks in the history of the Russell 2000 is on the verge of ending. Its 50-day average is close to cross below its 200-day for the first time in more than 600 sessions.

The ends of other long streaks preceded some tough markets, especially shorter-term.

The latest Commitments of Traders report was released, covering positions through Tuesday

The 3-Year Min/Max Screen shows that “smart money” hedgers added to their already-extreme long position in orange juice but there were no new extremes of note.

Soaring Staples

The 10-day Optimism Index of the Consumer Staples XLP fund is at 77. There have been 34 days in its history with this high of a reading.

This is an abridged version of our Daily Report.

An almost-thrust

At the end of October, volume was flowing overwhelmingly into declining stocks, pushing the Up Volume Ratio into oversold territory. That has now changed, and the switch has been aggressive enough to (almost) trigger a traditional breadth thrust, which has been a good – but not great – sign going forward.

These bounces tended to lead to some upside follow-through over the next couple of weeks, with only 4 losses out of 21 signals, all but one being smaller than -1%. Reward was more than three times greater than risk. After that, it was still generally positive, but much less consistent.

Bond boondoggle

Investors pulled nearly $20 billion from bond funds at the end of October, one of the worst weeks ever. Other times the outflow was this large, the broader bond market rallied. The outflow was precipitated by bonds rallying fewer than 20 out of 50 days, suggesting deep oversold conditions.

Oil’s bear market

Oil declined 20% from its peak, triggering the signals noted in the November 6 report.

Fed adjustments

Markets were mostly muted in reaction to the FOMC decision on interest rates. The dollar gained more than 0.5%, which has led to more gains the next day 80% of the time, but nothing consistent after that. Emerging markets (the EEM fund) lost more than 2%, which has only happened 5 other times.

This is an abridged version of our Daily Report.

Election excitement

Following the midterm election, the S&P 500 jumped more than 1%, and sector performance showed a strong risk-on bias.

It was the best post-election day rally for the S&P 500 since 1982, which is the only one (midterm or presidential) that managed a larger gain than stocks enjoyed on Wednesday. Similar returns following other major elections since 1950 led to consistent gains in the months ahead, with few (or no) losses over the next 3-6 months.

Back to neutral

After a large pullback from a high and a deep oversold reading in the Relative Strength Index, the S&P 500 has returned to neutral. Now that stocks have recovered a good chunk of the decline, they’re no longer oversold, determined by the Relative Strength Index (RSI). After dropping well below 30, the indicator has finally moved back to neutral territory above 50.

While the lack of oversold readings is no longer a tailwind, the lack of them wasn’t a long-term sell even though the index did tend to pull back over the next two weeks.

More new highs

After more than 30 days with more 52-week lows than 52-week highs on the NYSE, there were finally more highs than lows on Wednesday. After similar recoveries since 1965, the S&P struggled in the shorter-term, with gains over the next two weeks only 41% of the time and an average return of -1.4%.

Oversold volatility

The Optimism Index on VXX is below 13 for the first time in months. According to the Backtest Engine, that has happened on 59 days since 2010.

This is an abridged version of our Daily Report.

Oil’s very bad month

Crude oil is nearing a 20% decline from its October peak, a bear market according to most definitions.

Optimism has since dropped below 40 for the first time in over a year, but it’s still well above prior bouts of pessimism when it has dropped below 30 or even 20. More losses like the past week should go a long way toward getting us there, as the front-month futures contract is now down 19% from its peak. Whether you want to call 20% a bear market or not, it’s still a big drop that tends to unnerve the bulls.

What’s also notable about this slide is how persistent the past week has been, showing some urgency among sellers. Crude has now declined for 7 straight sessions, its longest slide in over a year. There were only three other 7-day losing streaks that triggered within 50 days of a 52-week high, and all of those rallied strongly, so at least that’s something for bulls.

Not much going for it

It’s hard to find many outstanding positives for oil, though. Sentiment is the lowest in a year but not quite to washed-out levels. Hedgers still haven’t covered many shorts, and seasonality is mostly negative until the New Year.

Election toss-up

It’s mostly useless for laypersons to guess at election outcomes and even more so, the reaction in markets. But it’s a popular pastime, so we show the few other times that an unpopular president has suffered losses in Congress in a midterm election. Stocks did fine, other assets were mixed going forward.

Mexican recovery

The 10-day Optimism Index on the EWW Mexico ETF just crossed up from below 20. According to the Backtest Engine, other times it recovered like this, it continued to rise over the next three months 76% of the time by an average of 9.6%.