It’s becoming increasingly probable that we are reaching, or have reached a capitulation bottom for this stage for the markets. Either that, or it really is the end of the world. In which case…
Today I’d like to cover a few of the indicators that suggest a capitulation bottom is nearing, if not already here. I’ll be short and sweet in commentary. The charts say it all.
VIX is nearing capitulation highs—very close to my “green buy signal”. Also, as Larry MacDonald of the Bear Traps Report (www.thebeartrapsreport.com)
notes: “The VIX index (fear index) is well into backwardation (front month more expensive than the outer months). Meaning, investors are paying up for front month protection as they get more and more nervous. To us, this is ultimate measure of fear because it represents how much investors are willing to pay for front month short term protection on the market. In other words, the richness of the 2 month vs the 8 month is at extreme levels. Historically, when it reached these levels it has occurred at the same time with near term market bottoms in equities.”
Disproportionate put (defensive) buying vs. call (optimistic) buying. In fact, put/call is at an EXTREME level–showing massive capitulation. Levels not seen for 20 years+.
Smart/Dumb money ratio
Smart Money, aka: Institutions, sophisticated investors, insiders and commercial hedgers are moving into “extremely optimistic” territory. They’re 71% optimistic–that’s high.
Meanwhile Dumb Money aka: mutual fund buyers, small speculators, odd lot traders are selling. They’re becoming extremely pessimistic. Only 17% of the dummies like the markets. That’s low.
History has shown us that sophisticated pension managers and commercial hedgers are prone to buying and selling at the right time, while mutual fund investors and small traders are prone to buying and selling at the wrong time. Its best to see them thinking in opposing fashion. This is one of those times. The smarties like this market. The dummies are running for the exit. Very bullish. Chart courtesy www.sentimentrader.com.
Short termed momentum is looking for a bounce
I’ve said what needs to be said on the chart below – the only point not mentioned on the chart is the less-clean look of RSI at this time. I prefer a clean, sharp drop & rise. Summer support is being tested.
In a nutshell
Look for a rally soon! Near termed target for the S&P 500 will be 1990 +/-. From there, it’s either time to sell, or take your chances and see if that neckline will break to the upside. I am inclined to do both. That is, sell some positions near 1990, and watch the positions I hold for danger signals. Last week’s blogs explained my intermediate view on the markets beyond a short termed bounce. You know where I stand.
Best of luck in this rather harrowing environment. Don’t forget to leave your comments below. Remember, we’re all in this together!