Unlike each of the past two summers when we saw the VIX (a measure of fear by traders in the options markets) explode up to 48 as the indices regularly moved 2-3% a day, this summer’s correction has thus far been only mildly scary. In 2010, the indices corrected roughly 16%, while last year it was a full 20% correction. This summer, most of the damage was done in May as we came down 11%. Moreover, the VIX barely made it past 27 before fear abated.
The issue going forward is whether we need to see some real fear come into the market before arriving at a true bottom. So far in June, the bulls were doing a great job until last Thursday’s sell-off, which carried over into yesterday’s downdraft as well. While the 1266 lows from June 4th on the S&P 500 seem far away, I believe there are quite a few traders who have been buying stocks over the past few weeks under the bottoming theory. If we lose 1306/7, I suspect a huge wrench will be thrown in that thesis and we are likely to see a stampede towards the exits.
The counter-argument is that the market does not always need to have a traditional capitulatory selling climax in order to bottom. In addition, it may be too obvious to presume that we will have three summer in a row of similar type of price action. Thus, I do not want to stubbornly stick to the idea that, for example, the VIX simply must rocket above 40 in order to see a true bottom. Instead, I will be focusing on the the vast amount of charts out there, viewing them altogether as specks on a mosaic. As such, I have my eye on some potential long setups that have weathered this correction extraordinarily well, discussing them with members inside 12631. However, I am still not in a rush to put them on just yet.
Whether the market needs to become very scary remains to be seen. Presently, the price action has only been mildly scary this summer. Sometimes, that is enough to work through a corrective phase. If that is going to happen, the bulls must stem the tide of the bears’ newfound life after the sell-offs in two of the past three sessions.
Photo proof of excellent parenting!
You should see the doll he sleeps with!
nice stuff as always.
One thing that I always keep in the back of my head re TA is in a market like this sometimes the charts lie. They look good right up until they don’t and in hindsight we can clearly see churn where we once saw bases.
We may or may not see fear, but I do think we need a catalyst to give us a good trend. Until that happens I think this is a pick-pocket market where the pros bleed you small & you die from a death of a thousand cuts.