McMillan's weekly commentary:
The Option Strategist HOTLINE
Thursday, August 30th, 2001
Despite the negative action this week, the investing public has not gotten "worried"
at least not from the standpoint of the sentiment measures that we monitor.
While it is true that Thursday's action was somewhat extreme, and has therefore
pushed a few indicators into oversold territory, there are merely of a short-term
nature and are not expected to produce any meaningful reversal of the bearish
trend.
The equity-only put-call ratios are still in a bearish mode. That is, they are
rising on their charts. Despite all the rhetoric, the bottom line is that traders
just aren't buying that many puts. On CNBC the Network of Bullish Cheerleading
they were bemoaning another down day today, while saying they couldn't understand
how technicians could still be calling for a 'capitulation.' In their mind,
the fact that market has dropped so far is capitulation enough. In reality,
capitulation has nothing to do with price levels it has to do with investor
psychology. And, despite falling prices, the average investor is really not
all that worried. He still feels as if the market is ready to "come back"
that the bottom was put in place in April and it's merely a matter of time until
he gets the money back that he lost last year. Believe me when I say that attitude
which also permeates many members of the professional community is not capitulation.
In terms of the put-call ratio, 'capitulation' would be reflected as massive
put buying pushing the put-call ratio to levels as high as or higher than those
seen in April, 2001, or December 2000. We're not even close.
Another area where 'capitulation' would be very evident is that of implied volatility.
In fact, it is implied volatility which normally shows the first signs of investor
panic. The main measure of such volatility ($VIX) is still as good as any
for all the volatility charts are more or less the same. $VIX is still within
its recent trading range (between 21 and 29) despite the very bearish breakdown
of the last couple of weeks. Just to recap the last couple of weeks: first,
there was a breakdown below the support levels that had contained all declines
since April (but that didn't really worry investors). Then, there was a reflex
rallied that failed (but that, too, was taken in stride by the overly bullish
crowd). Another decline last week was shrugged off because there was a huge
200-point up day last Friday, which the bulls chose to interpret as the bottom
(rather than as just a one-day oversold rally as it turned out to be). One
of my "favorite" statements of the week was issued on Monday morning on the CNBC
(No Bulls Chastised) network by Jim Cramer, who crowed "This market wants to
go up!" Right. Finally, even though that rally was
slammed into oblivion, we are still not seeing any sort of panic by option traders.
Is there any reason for hope? Well, yes. The market is oversold as measured
by our new "stocks only" advance-decline indicator. That is, the "normal" oscillator
value is only modestly oversold at 94.21, but our new "stocks only" oscillator
is much more oversold, at 308.83. So another sharp, short-lived rally could
be at hand, although a true buy signal wouldn't be realized until the oscillator
rose above 180. If you are old enough to remember the 1974 bear market, you
remember that there were some ferocious rallies (about 3% upward in a day) but
they were quickly subdued and lower prices followed. The same sort of thing
is happening now. We really need to see much more pervasive bearishness before
we can turn bullish.
What will it take to turn investors bearish? I don't really know, but until
they do, you can't expect a meaningful rally. Those of you who have read my
work for a long time know that I don't get on a
"soapbox" too often, but I am now. I think it borders on travesty that major
financial networks and media publications continue to promote the bullish case
without remorse, when any beginning student of charting can tell you that the
trend is down. This remorseless action has brainwashed and paralyzed the public
into inaction. As long as the public refuses to pull the trigger and disgorge
its positions, there will be no bottom. |
