Stocks bounced higher on Monday, fuelled by strength in markets overseas, as well as takeover news in the US.  Major benchmarks in the US closed higher by over 1%, the largest one-day jump since May.  The S&P 500 Index bounced firmly from its 200-day moving average, yet again, emphasizing the significant support that exists at this long-term average.  Since the start of July, the large-cap index has recorded three major tests of this average, making it vulnerable to breakdown as the weight of the benchmark leans on support.  The percent of stocks in the index above 200-day moving averages currently sits at 57%, down from 90% recorded last summer; market breadth continues to wane.  As an increasing number of stocks break below their 200-day moving averages, the weight on the broader market will become apparent, turning what was previously support into resistance.  For now, support cannot be denied, a trend that will continue until it ends.  However, should a break occur at this long-term average, the losses are likely to continue over the short to intermediate-term.

Sentiment on Monday, as gauged by the put-call ratio, ended overly bullish at 0.56.   Monday’s closing put-call ratio matches the lowest level of the year, last charted on May 11.  Typically, when investors lean bullish to the degree that the ratio is suggesting, equity market losses typically follow.

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