VIX & PUT/CALL RATIO NEARING CAPITULATION BUY SIGNAL

December 4, 20214 Comments

Last week I reported on my Bear-o-meter reading – which  I noted had turned from a “neutral” score in November, to a “Bullish” score on Thursday. I noted that the Bear-o-meter is not a neartermed timing mechanism. However, it does tend to be pretty good at approximating buy and sell points if one has an outlook of a few months. As I noted on last weeks blog – which you can view here – its a good idea to start legging into the market if you’ve been holding cash. Legging in doesn’t mean spending the entire wad of cash all at once. It means buying in increments. Case in point, Friday saw another down day. It may interest you that we held 10% cash going into the November/December correction – and we invested 3% of that cash during the selloff on Friday. We will continue to look for opportunities to invest the remaining cash in the coming days.

The Bear-o-meter presents many indicators that measure risk and reward over different time perspectives. The two most sensitive vehicles I monitor within that compilation are the CBOE Put/Call ratio, and the VIX. Both of these indicators measure the dynamics of current option activity. The put/call ratio looks at the total ratio of flow into / out of bullish call buyers and bearish put buyers. “Too many” bulls/call options vs put options indicates irrational exuberance – and vis versa (irrational fear) for too few calls vs too many puts being traded. The put/call chart, below, shows us that the environment is rapidly approaching an uber-bearish fearful level. My “strong buy” signal on this indicator is 1.25, and its already at 1.15. Pretty darned close – I consider this level is a “decent buy”  signal.

 

The VIX was heading in a downward trend as the market rose over the past number of months. This can last a while – but that trend is always a warning. My trigger point for the VIX as a “strong buy” signal is 32. It hit just over 30 on Friday. If you look on the chart below, you will see times where the VIX has reached peaks well below 32 – and triggered buy signals (aka market turnarounds). I think this moment has the potential to be one of those times. Lets call the current VIX level a “decent buy” signal, as we did the put/call ratio level noted above.

 

Conclusion

Sure, the market could sell off a bit more. Support on the SPX lies around 4400. Give or take a few points. We could see a test of that level. Or not. Perhaps the VIX and put/call ratio will hit their “strong buy” capitulation signals before markets reverse. That said….The market is in an uptrend, as noted on my chart below. Its making higher highs and lows, is above its 200 day (40 week SMA) – and its testing the 50 day (10 week) SMA which lies around 4500. That, and the Bear-o-meter just went bullish. That’s why I am legging into good stocks right now. If the market catches support next week, I will buy as it rises. If it declines, I will wait to see if 4400 holds. The odds are, that it will hold 4400 no matter what happens in the next week or so. I’m putting my money where my mouth is by stepping in.

 

Housekeeping

  • I have recorded a video on oil – which I expect will be available on Monday here.
  • Happy to report that this coming week begins the recording of my Technical Analysis course. As such – I wont be around much this week. I may miss doing the second blog of the week.
  • If you subscribe to our newsletter, we will be sending the newest version on Monday. Please visit this page if you do not already subscribe.
  • ValueTrend tends to shine during volatile markets. The recent corrections (October and late November/early December) have once again proven this tradition stands. Check our 1-3 month numbers… Equity Platform. 

4 Comments

    • The index etf we bought just broke support. I tend to follow two rules when trading:
      1. First, buy stocks in 2-3 increments (leg in!).
      2. Next, if support is broken, count 3 bars (which could be 3 daily chart bars if its a neartermed trade up to a 3 wekly chart bars if its a mid-longer termed trade). If the stock remains below support after those 3 bars, we sell

      So- following those rules: We did one leg into the etf, watched it rise, watched it fall. Now its broken. The good news about our way of doing things is that we did not buy a second or thrid leg because we did not get the follow-up as the stock rallied – so our capital at risk is low.
      Next – if that break maintains for 3 bars (weekly chart x 3 bars in this case as we view this as a longer termed play)–then we sell. Its below support of our etf by one bar. 2 more weeks and we sell.

      Reply
  • – I believe I’m watching the ETF of which you speak.
    – At this point, I’m wondering if tax-loss selling was excessive.
    – Hypothesis : bounce in Q1 ?

    Reply

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