Let's take a trip down memory lane -- back to the year 2008. I know I have used the 2010 chart so often you likely have it imprinted in your mind by now. But I want to talk about 2008 this time, and it's not October 2008 that I want to discuss.
First, let's understand why. If we look at the 10-day moving average of the equity put/call ratio, you can see the 10-day moving average got to those two prior peaks on the left side of the chart. I know, the chart is a bit scrunchy, because I have put so much data on it, but they're there. And they were both in 2008.
The one on the far left arrived in mid-March 2008. As a reminder, we often refer to that period of time as the Bear Stearns low. It was when Bear Stearns, a major investment bank at the time, essentially went under and JPMorgan (JPM) bought them for a song.
I think this recent low looks more like the second peak on the chart, but let's explore this one first. The rally lasted nearly two months, although the reality is that by early April, it had done most of what it was going to do. There was a correction and then it rallied back, made a marginal higher high and quite frankly it was mostly a lot of churning after that. But it was a rally that made folks feel better. It was a rally that had seen the indicators get oversold and extreme to start and worked their way to overbought by the end. And then we came down again.
Now let's look at the second peak. It came at the Thanksgiving low that year. We rallied 20% in a matter of days (sound familiar?). But we did not turn tail and collapse after that, but rather we did a lot of what appeared to be base building through the month of December. We made a high as we turned the calendar into 2009. And then we came back down. This rally lasted about six weeks.
Too many of the intermediate-term indicators just got oversold, which means it feels to me like it is far too soon for a retest. Short term, we're going to get overbought soon, so a pattern akin to what we saw in late 2008 makes some sense. We had downs and ups after the furious decline in November, which may not look like a lot, but that decline was 25%. We worked off the oversold-ness. We worked off the extreme sentiment. We worked off all those indicators that led to the rally.
I remember that month of December people welcomed the calm, even though the news wasn't great. Notice how the 10-day moving average of stocks making new lows contracted from that Thanksgiving low? It continued to edge down right through year end.
Now look at a close up of that 10-day moving average of the equity put/call ratio, how it continued to head down into year end as folks got more comfortable and less on edge.
Finally take a look at how the Volatility Index was 80 and worked its way down to 41.