Someone whom I greatly respect ran a study comparing 9 day volatilty VXST to 1 month VIX. Whenever elevated, things get mixed and then mildly bullish 3 month outcomes. Wait, doesn't all this simply mean that something like an earnings event or FDA decision is coming for the broader market? So, you would expect that this would happen around major news. An election would count. So would a Brexit vote. I imagine if these metrics had been around in 1999 you would have seen the same thing around Y2K.
Most of these studies, including mine, are flawed. But some can give a sense when things are overdone. Or outline binary paths. Several of these are operative right now. For Biotech stocks, XBI just had his first positive day after a seven day down streak. Historically, this has been relatively bullish short term. Additionally 18 out of the last 25 trading days have been down in XBI. Historically, this has marked several major bottoms. So these quantitative studies can help one pick out major turning points for mean reversion.
For the market in general we are operating on a six day down streak for the SPX. I know that five down days historically has been positive. Six down days whoever makes things look a bit more bearish, at least short-term. Various metrics of the put call ratio have also hit extremes recently. Most of these examples have 90 to 100% odds for a fairly sharp up move coming shortly.
Lastly seasonality is becoming extremely favorable, particularly for bios. That being said, bio tech indices have broken many key trend lines and moving averages in the past few weeks. We are also entering tax loss selling season. Lastly the kind of behavior we have had in recent weeks in bio stocks is more indicative of a bear market than a bull mkt. Examples include late 2008 versus early 2008 and 2009 versus 2008. Also the great bear market of 2000, 2001, and 2002. So odds have increased dramatically that the bear market has not completed. |
