The pressing question now is, "Has the bottom been made?" The
market suffered a rather severe decline for several days, falling below
the March lows. Then, out of nowhere on Wednesday afternoon, a
large buying spree took place. However, there was no follow-through
on Thursday, and at this time we do not have any confirmed buy
signals. Therefore, we are still cautious, but are ready to turn bullish
if some confirmed buy signals are registered.
As noted above, prices of $SPX, $OEX, and the Dow all
penetrated below their March lows (QQQ did not). Where are the
bullish analysts who, back at the end of March, paraded across our TV
sets, "guaranteeing" that the March lows would not be revisited?
Nowhere to be seen, I can assure you -- just like their apologies. Back
to reality: the first conditions for a possible double bottom (a "W"
bottom) have been fulfilled by the market's having pulled back to
levels near the March lows. It doesn't really matter that they violated
the March lows by a small amount. Don't get me wrong: the index
charts look terrible, but if the oversold conditions that we are seeing
evolve into true buy signals, they should be able to rally -- overhead
resistance notwithstanding. The main caveat is that, should this
week's lows be penetrated on the downside, then a more severe bearish
scenario will likely unfold.
Equity-only put-call ratios continue to climb, and that means they
remain on sell signals (Figures 2 and 3). These would probably be the
last of our indicators to turn bullish, which would only occur if they
peaked and began to decline.
Volatility indices ($VIX and $VXO), however, could be one of
the first to register buy signals. Recall that a buy signal from a
volatility index occurs when volatility forms a spike peak during a
market decline. These two volatility indices did peak on Wednesday,
as $VIX rose above 20. If $VIX closes below 18, that would register
a buy signal, in our opinion. Figure 4 shows the recent action of
$VIX. However, if $VIX continues to rise, that means it would remain
in a bearish state.
Finally, let's discuss market breadth. It was downright terrible.
In fact, there still hasn't really been a strong day where
advances outnumbered declines by a wide margin. It is going to take
one of those to push market breadth to buy signals.
So, volatility indices and market breadth indicators are closest to
generating buy signals. If they do turn bullish, then the equity-only
put-call ratios should follow in due time. As these indicators turn
bullish, we would begin to take long call positions in $OEX.
However, don't rush things. Don't buy until we see some confirmed
buy signals.
