Most of the articles on CBSMarkwatch are fairly useless. It has been blown away by its competitors at Yahoo, CNNFN, CNBC, and TheStreet.Com, but today it had an article worth reading about the option sentiment indicators(VIX, VXN, put/call ratio) which I follow closely. Click here to read it:
cbs.marketwatch.com
Read the article and lets think about what we need to see to get a bottom and what it will look like. The other week I became very negative on the Nasdaq once it broke its support levels. However, most people on TV did not turn negative nor did the average investor according to investors intelligence surveys and these option sentiment indicators. We got a small rally into yesterday's Fed meeting and people got excited. And today in the afternoon the VIX dropped and more calls were bought even though the market was in the red. People are ignoring all chart patterns and are still expecting the market to go up instead of down.
Although the market is in a downtrend it has been very orderly. We've had a few steep down days, but they have been followed by short lived wonder rallies. The VIX is trading in a complacent zone and there has been no panic buying of puts. People remain optimistic about the market.
What is happening is that the short lived one day rallies are giving people hope. Picture someone who turns on CNBC every night when they come home to work. When it finishes red they curse and then turn the channel quickly. They check the next day to see it red again and then worry a little. On the third day they see that the market is up and hear some fund manager on CNBC talk about a rally around the corner. They stay glued to the TV and listen to the litany of reasons to remain a true believer. Perhaps the next day they buy some stock or even some calls. Or maybe their broker calls and tells him about a technique called dollar cost averaging.
Markets enter downtrends when sellers outnumber buyers. They use every short term rally as an opportunity to sell. That is what you saw yesterday. The downtrend doesn't end until the sellers are finished liquidating their stocks. People like the man I imagined watching TV are also potential sellers. Once the average investor panics he sells or buys puts to hedge his stocks. So extended declines like we are seeing now only end with a final wave of frightened sellers. There will be no real end to this until these people are flushed out of the market. The hard truth is that this process is going to mean a lot of misery for most people.
In the coming weeks we are going to see a lot of short term rallies which will fuel the bear by giving people false hopes. I won't start to think that any of them represent a bottom or an end to the selling until I see real signs of fear and panic in the market, such as the VIX going into the mid 30s or if the Nasdaq can break its downtrendline.
And this downtrend line is also important to look at. If the market suddenly makes a large and fast drop then it is possible that we can see that panic in the market come soon. However, it would take a surprise negative event for that to happen. If it follows the pace of this downtrend line, which is more likely, then the selling will remain orderly. At its current pace the Nasdaq will get down to the April lows by the middle or end of September. I'm sure we'll get a large rally right before that happens, but it will be important to see what the market sentiment looks like. If peopel are still complacent at that point then things will really get bad. You can mark September on your calendar. |
