Another down day in a long series that began in January. Its beginning to look like the indexes are all going to zero! Well, actually, its beginning to look like the market is building up to the proverbial capitulation phase.
Many traders are expecting a climax of selling some day in the near future, with the markets dropping more than 10%, at least on an intraday basis. If a day like that comes along, it may be a good time to get brave and put the explore part of your portfolio to work with a bet on some double-long, exchange-traded funds. The market should be close to snapping back.
Its interesting that stock markets have fallen decisively below their November lows, yet, measures of fear in many cases are stillnoticeably below the levels reached during the earlier market lows. Take the VIX. It has climbed but is still just at 50, compared to 80 back in the fall.
The decline has been too orderly. Thats one reason for expecting the bottomstill lies ahead. We need to see the gauges of fear soar yet again to signal the bottom
But its possible that the VIX and put/call option trading wont spike as much this time around, says James Kostohryzof Minyanville. Options traders are relatively sophisticated and most aren’t brazen enough to be shorting the market at these depressed levels. That to me is explaining the lack of a spike in put/calls and the VIX, he writes.
Look at other indicators, he suggests. Some of them are signaling capitulation: for example, the American Association of Individual Investors (AAII) weekly sentiment survey is off the charts with 70% of AAII members bearish the highest percentage ever.