Moody's Weighs In: Will the Downgrade Halt the Rally?
Top credit rating agency $Moody's(MCO)$ has lowered its assessment of the United States' ability to repay its debts from the highest level (AAA) down one step to AA1. This puts Moody's in line with other major agencies. They cited concerns about the increasing amount of government debt and the growing cost of managing that debt due to high interest rates and large budget deficits. Moody's analysts also noted that if tax cuts from 2017 are extended as expected, it would significantly add to the national debt over the next decade, projecting the deficit and debt-to-GDP ratio to rise considerably by 2035.
As you know, I focus more on price action than on news. News often acts as the catalyst for market reversals based on price conditions, as we saw when the S&P 500 and Nasdaq were overbought in February 2020 (pre-COVID), September 2018 (tariff war 1.0), and even recently in February 2025 (tariff war 2.0).
Today, I add two factors to consider caution for long positions next week, the first one is the Put/Call Option Ratio, which is a measure of market sentiment and as indicated by the fear and greed index; this index is in greed mode. Put options are typically bought to bet on a price decrease, while call options are bought to bet on a price increase. A low ratio like the one we have today (more calls being bought relative to puts) can suggest that investors are becoming increasingly bullish, anticipating a price increase. Historically, extremely low levels can sometimes indicate overbought conditions and a potential for a bearish reversal, as bullish sentiment may become overextended. Notice the lows in July 2024, ahead of a multi-week pullback in the stock market, or in January and February 2025.
Does it always precede a bear market or major correction? Not necessarily, but as highlighted with the yellow circle, the S&P 500 saw a decline beyond -2% in October 2024; so the context suggests caution for long positions.
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