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Fear & Loathing In The Stock Market at Trader’s Narrative

Another horrible day on Wall Street with pretty much the whole screen in red. Fear and loathing is getting thick. The only redeeming characteristic of the market is that we are seeing technical signals of extreme oversold all over the place:

Option Traders
ISEE Sentiment Index reached 60 - meaning for every 100 puts, 60 calls were purchased by retail traders. The last time it was in this range was in March 2007 and August 2007.

The CBOE (equity only) put call ratio almost reached the magical 1.0 level again - the second time this week. Both of these indicators are showing a lot of fear in the options market, especially from retail traders. Which is great from a contrarian perspective.

Until today, the VIX index had been surprisingly muted. Not any more. It spiked 17% to almost 29. And more importantly, relative to its moving average it is now within reach of an extreme high that has marked previous market troughs. But as Bill (the expert on the VIX) explains, we can certainly bottom without any sort of spike in volatility.

Market Internals
On the big board, there were 2,694 declining stocks and only 475 advancing ones. Likewise, declining volume surged to 1,957,006,000 while advancing volume was only 206,905,000. Things were similarly bleak on the Nasdaq.

My guess is we just had another another 90-90 (Lowry’s) down day. The previous one was January 11th 2008. Back to back 90-90 down days are normal. What we need next is a decisive 90-90 up day now.

Market Breadth
Wherever I look, there are indicators of a very oversold market. The bullish percent charts of the Nasdaq, NYSE and the S&P 500 are showing either 52 week lows or multi-year lows:

bullish percent spx jan 2008

Likewise, the charts of indices for the percentage of stocks above moving averages are at extreme lows. For example: less than 11% of S&P 500 stocks are above their 50 day moving average. And less than 20% above their 200 day moving average.

Same thing for the new high-new low index for various markets. It can always get even more critical but right now, that looks unlikely since most breadth indicators are hugging the redline extremes.

Finally, we’ve had a famous bull throw in the towel. Dan Sullivan, a newsletter writer and a veteran of the markets has liquidated his holdings and gone 100% cash. Usually a significant market bottom doesn’t arrive until it shakes out all but the most resolute bulls.

Considering everything, I just can’t see how this is the beginning of a bear market. Usually they are accompanied by euphoria, good news and smooth sailing but now we are seeing crisis after crisis, panic, fear and loathing. Just the sort of thing that builds a wall of worry… which a bull market climbs.

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3 Responses to “Fear & Loathing In The Stock Market”  

  1. 1 Tom


    Dan Sullivan does not appear to be a fade. Here’s his record of market calls and it looks pretty decent:

    He’s not too far from the top of the list here either:


  2. 2 Johan

    Nice note Tom!

    Although a 57% winning rate in a certain kind of market (bull market), doesn’t make him Nostradamus.

  3. 3 Tom

    Even the highest rated “guru” there doesn’t have a terrific percentage. In the end the result also crucially depends on the size of their wins and losses. But what I’ve learned is that Sullivan was in cash from Feb. 2002 and in November of 2002 said that he didn’t buy the summer 2002 lows since he wasn’t convinced that was THE bottom. He suspected in March 2003 that was THE bottom and got long in April 2003, partially going to cash a few times since, but only fully going to cash NOW. I don’t know how much of the 2000-2002 decline he was able to sidestep. I sent an e-mail to Hulbert from the website, asking if he could provide more details about this. (I’m curious!) I don’t know if he’ll respond.

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