Friday may be one of the few times the VIX call buyers were spot on. But it was the small caps that took the biggest hit, not the S&P, which is supposedly what the VIX measures. Be that as it may, I still believe an extremely low put/call ratio for the VIX often leads to short term rallies in stocks. Clearly not always.
As noted above, the Russell bore the brunt of the selloff as did Nasdaq. This is a drastic change from what we've seen since the February lows. We've looked at this chart of the small caps relative to the large caps several times of late but this time I want to note that there really does tend to be a range the ratio trades in.
Several weeks ago when the Russell was on a tear many believed that the ratio would "break out." At the time I noted that if it did so, it tended to be a last gasp (see the blue arrow on the left side of the chart). Even when it falls out of the bottom of the range, it tends to be a relatively quick event and last gasp. See the blue arrow in 2016.
For this reason I do expect we will see the ratio make its way toward the lower end of the range. In 2015 it took about six months to do so. In 2017 it took about a year. I don't know how long it will take this time but what we need to understand is that it doesn't do so in one fell swoop, it does so gradually over time. Also keep in mind this doesn't mean the Russell goes down all the time, it just means it underperforms the big caps.
If we look at a chart of just the Russell 2000 alone we see it is hovering at an uptrend line. My guess is it eventually breaks the line, whether it is this week or not is a coin flip to me but I think it does so sometime in August.
One reason I think so is because we didn't see much in the way of panic on Friday. For example the put/call ratio was 105% but when you consider that the equity put/call ratio didn't even tag 70%, something it did two weeks ago it tells me there was not the kind of panic we would typically look for on such a hard down day. There wasn't much panic selling either. The TRIN did not even get over 1.0.
But it was the number of stocks making new lows on Nasdaq that makes me think we're not quite done with the volatility yet. Those green marks on the chart of stocks making new lows occur when there are spikes in new lows, as there was on Friday. In all three cases there was no V formation, but rather a W. The only V formation was the February low and that saw a massive jump in the VIX, a very high put/call ratio and a high TRIN as well as 90% of the volume on the downside so it was a very different scenario than Friday.
