That Was No Panic

 | Nov 08, 2012 | 6:00 AM EST
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So much for the U.S. presidential election clearing things up; I'd say it muddied the waters even more, because the "fiscal cliff" and Europe worries came back in a heartbeat.

Let's review the ugly day in two parts. I realize I seem to do this quite a bit lately, but that's because the market keeps setting up short-term rallies even as the longer-term indicators continue to point down. We'll begin with the immediate shorter-term, and look at some of the statistics that emerged from the decline that say the market should enjoy some sort of bounce.

The put-call ratio was at 121%, its highest level since June 13. Such a high reading tends to lead to a short-term rally. However, if you were looking for real panic, then let's put this in perspective: The panic low from last spring came in mid-May, with a put-call ratio of 145%. I'd say this reading indicates investors are somewhat scared.

Furthermore, the put-call ratio for ETFs was above 200%. Since January this has occurred four other times, and in three of those instances the market proceeded tumbled for another day or two -- and then rallied. In the other instance, the market rallied the very next day.

The Arms Index (TRIN) came in above 2. This, coupled with the fact that 90% of NYSE volume was on the downside, usually means we should see a market bounce.

If we throw in the fact that the market isn't yet overbought (that comes next week), then we should see a rally attempt within the next three days.

There is some other good news. In a reversal of fortune, this time the Dow industrials made a lower low, while the Dow Jones Transportation Average managed to stay above its recent low. That, so far, makes for a Dow Theory non-confirmation. But if I were putting these in order of importance, this item would not be high on the list.

Now comes the list of what is still problematic in the intermediate term. The McClellan Summation Index had a window to improve, and it appears the indicator will blow it: It could turn upward right now, but instead it will continue declining. The 30-day moving average of the equity put-call ratio is still heading up, a bearish indication. The banks rolled over badly Wednesday. The Dow Jones Utility Average, which often lead a turn in the market, has collapsed. The only good news is that, earlier this week, we calculated a target near 440 for the index -- and, much to my shock, it's getting there in a hurry.

Then there's the number of stocks making new lows, which refuse to contract and instead continue to expand.

Number of Stocks at New Lows -- NYSE

Meanwhile, the CBOE Volatility Index (VIX) did not get jumpy, in my view. The Investors Intelligence readings continue to show too many bulls relative to bears, and the other surveys also do not show any panic. Panic leads to decent bottoms, while complacency leads to failed rallies -- and, in my view, sentiment remains complacent. That said, Wednesday's put-call ratio has at least put the market on the path toward capitulation. When we see capitulation we should be buyers. When there's complacency -- which I believe is the case right now -- we should be sellers into rallies.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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volatility is quite low here, and we could see some downsides here in the short term. ...



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