Is This An Oversold Bounce, Or The Start Of A 10% Correction?
There are some signs we could be nearing a meaningful bottom, yet there are others this is just an oversold bounce and more pain to come.
First off, the good news and why a major bottom could be near. The CBOE options equity put/call ratio is nearing a very high level – suggesting there’s a lot of fear in the options market. I’ve been talking about this one for a while now as a concern, but I’d say it is now more a positive than negative. Still, the bottom line is the trend, as this ratio tends to trend inversely with the SPX. This ratio is now high, but I’d need it to reverse lower to become comfortably bullish.
Looking at the AAII sentiment poll, the number polled that consider themselves bearish is at its highest level this year and highest since August ’13. That is a good sign, as the masses are getting worried after the recent weakness.
Also, the bulls haven’t been greater than the bears for three straight weeks. The last time we saw that much persistent worry was May ’13.
Lastly, the NAAIM survey just outright panicked. I like this survey as it looks at what real active managers are doing. Well, this one just dropped 38% in one week to 51 from 82. In fact, the 31 total point drop was the 7th largest one week drop all-time.
Now for the bad news and why any near-term strength could be just an oversold bounce. The AAII and NAAIM might be panicking, but the Investors Intelligence poll has had bulls greater than 50% for 24 weeks in a row. This is now tied for the 4th longest streak ever. That is a lot of persistent bullishness.
Seasonality isn’t doing anyone any favors here either, as we are in the midst of the only two months to average back-to-back negative returns going back to 1950.
Plus, when August is negative, it is really negative. Going back to 1980, there isn’t any month with a lower average negative return than August. August isn’t off to the best start in ‘14, so if that continues a good deal of more pain is likely.
Lastly, the VIX futures recently turned inverted. I explained this in detail here, but the bottom line is this has been historically very bullish. My take is it is a sign of an extreme amount of panic and since late 2012 it has marked some huge buying opportunities.
Well, a week from the latest signal, the SPX was down over 1%. This is actually the worst one-week return since late ’12. Is this formerly bullish indicator fading? If so, could this be a major clue something under-the-surface has changed and this pullback is something much different than we’ve seen in a long-time?
There you go. I’m torn on what could happen next. There are some good arguments to both sides. Some sentiment signals are flashing major buys. Also, you have to side with the bull market, as it has earned our trust. Still, seasonality and the poor results after the VIX term structure inversion are huge concerns of mine right here and now. If we turn back lower next week that could be a sign something indeed big has changed.
Thanks for reading.
Picture courtesy of CollegeDegrees360.
Recommended for You
Forget Fort Knox or the Federal Reserve. Texas has decided to start keeping its gold holdings within in its own borders. But what makes sense politically in such a sovereignty-loving place is creating ...Associated Press
Munchery is aiming to be a standout dish on a menu crowded with food startups.USA TODAY
A regular paycheck isn't the only way to ensure a steady flow of income. Whether you are already retired or simply planning ahead for retirement, by carefully selecting stocks that pay dividends on the ...Kiplinger
“The market right now hasn’t priced in a potential ‘no’ vote,” said David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., which oversees $815 billion. The Euro Stoxx 50 Index tumbled 4.2 percent on June 29 and the Standard & Poor’s 500 Index had its biggest plunge in…Bloomberg
BOSTON (AP) — New Balance thinks the U.S. military is dragging its feet.Associated Press
Congrats! You saved for retirement. Now, follow these rules, or pay the price.USA TODAY
What happens when an old debt comes back to haunt you again? Can you ever really put it behind you?Credit.com
Chinese stocks tumbled again on Friday, taking the week's losses to more than 10 percent, as the securities regulator said it was investigating suspected market manipulation and announced a slew of measures aimed at heading off a full-blown crash. After a slump of nearly 30 percent in Chinese…Reuters
Women typically save about half the amount of money that men stash away.USA TODAY
ATHENS, Greece (AP) — Dimitris is voting "yes" because he fears Greece would be in danger if it leaves the European Union. His daughter Alexandra is voting "no" because she is tired of richer European nations bossing Greece around.Associated Press
Sunday's referendum in Greece will set a new course for the country after a tumultuous half year of negotiating between Athens and its international creditors. A "Yes" vote could mean a new government, a news series of negotiations and Greece's continued membership of the euro zone. A "No" vote…Reuters
The confrontation between competing tour bus operators on Hollywood Boulevard escalated quickly.Los Angeles Times
Despite a short week for trading, and the kind of volatility that is akin to riding on a roller coaster, insiders continued to lay down the capital required to buy stocks.24/7 Wall St.
This isn't your Daddy's Caddy — it's a race car with Cadillac crests.Los Angeles Times
Independence Day weekend means big discounts at department stores, especially for these three product categories.TheStreet.com
The World Bank urged the Chinese government to reduce its sway in the financial system in a...Business Insider
It has been nearly a decade since investors have had to contend with the Federal Reserve raising interest rates. Or, from savers' viewpoint, it has been that long since the Fed did them a favor.Los Angeles Times
Happy July Fourth. Pour yourself a tall glass of iced coffee, and settle in for our longer form weekend reads: American Failure: The 401(k) is hailed as the future, but it’s horribly flawed. A select few ...Bloomberg
As 2015's second half begins, Action Alerts PLUS portfolio manager Jim Cramer and research director Jack Mohr look back at a good performance, and plan for a better one.TheStreet.com