Here's an interesting article from Barron's on the market for those that care:
Be Very Afraid
Which may be bullish, but short-term only
By Jay Shartsis
A number of years ago there was a very funny movie called Where's
Poppa? in which George Segal played a guy who was unable to say the word
"home," as in "putting his mother in a nursing home." A similar condition has
apparently afflicted numerous market commentators who can't seem to utter
the word "down," coming no closer than the non-threatening "volatility," as in
"we expect continued volatility in the market." I guess they're afraid of causing
a panic and being sued.
At any rate, the bummer this summer "volatized" about 50% off the average
Nasdaq stock and nearly 40% from counterparts on the NYSE, according to
research from John Manley, Equity Strategist at Salomon Smith Barney.
Carnage of such magnitude would seem to make any further debate about the
existence of a bear market downright silly.
In fact, these losses are on a par with what history identifies as the Great
Crash of 1929 -- which culminated in Black Thursday, October 29, of that
fateful year. The damage in that first leg down was 44.7% as measured by the
S&P (there was no Nasdaq until 1971). Not so well known is the fact that
the market put together a very big rally after the crash, gaining 46.8% as
measured by the S&P, in a five-month recovery that ran into March of 1930.
After that the real toboggan ride would start, and by June 1932 the damage
was a mind-numbing 86.2%.
The question arises as to whether the
market is now in a condition similar to
that of November 1929 and ready for
a substantial rally -- even if the world
is coming to an end later.
Larry McMillan, editor of the Option
Strategist, presents several indicators
which suggest that the path of least
resistance for stocks is now upward.
First he notes that the VIX, the
Chicago Board Options Exchange
volatility index, reached very high
levels, peaking on August 31 before
recently receding. That reflected puts on the S&P 100 being bid way up as
fear gripped traders. High fear equals market bottom. Of special interest is the
fact that the VIX stayed high for a few weeks, not just a one- or two-day
spike, and this might be extra bullish.
McMillan next points to the important equity put/call ratio, which soared to
levels of put trading not seen since the 1987 collapse. Intriguingly, he thinks
that back in the 1980s this ratio might have been inflated by reversal and
conversion arbitrage, "a strategy which is no longer prevalent." He concludes:
"Today's readings at 60% might be the highest purely speculative readings in
history, although there's no way of confirming that."
Another example of traders turning "too bearish" is found in the very high
levels of put trading for S&P 500 futures options. Place this in the bullish
column too, says McMillan.
To take advantage of the elevated VIX, Tom Gentile, chief options strategist
for Optionetics in San Mateo, California, suggests selling credit spreads which
"offer good risk/rewards as option premiums tend to revert to their averages."
Mike Oyster of Schaeffer's Investment Research feels that "anyone who
dumps their long-term stock positions now will end up kicking themselves in
six to 12 months after stocks have recovered and moved into new-high
territory." This he concludes because option indicators "are illustrating
runaway fear" which will ultimately show that "current levels represent a
historic buying opportunity."
Specifically, Oyster cites the 10-day moving average of the CBOE equity
put/call ratio, which reached the extraordinarily high level of .72 on
September 3 and .71 on September 10. "These are by far the highest
readings of the 1990s," he says.
Mike allows that a certain amount of pessimism can be expected as the
market pulls back but that the "extremely extreme" readings recorded of late
suggest that "stocks are a great buy even though there is a slight risk of further
downside moves in the short term."
I don't want to push the 1929 scenario too far. Still, comparisons may prove
useful. After the October Crash in 1929, a month long rally ensued, much like
the one we just witnessed in September. Then a successful test of the lows
took place before the rally resumed. If history is repeating, the scary market
plunge last week should prove to be the good buying spot implied by the
option indicators herein. |
