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Snap Back Rally Arrives As Expected, Now What? at Trader’s Narrative

After yesterday’s decimation of the indices, today’s sharp bounce was not that surprising. We had almost the mirror opposite: +90% of volume flowed into advancing stocks on the NYSE and 85% on the Nasdaq.

Advancing issues far out numbered the decliners also but not as much as the opposite yesterday. The percentage and points gained were similar in that the market clawed back some lost territory, but not nearly all that it lost on Monday. So I’m not sure if today’s brave snap back rally qualifies fully as a Lowry’s 90-90 up day.

Option Traders On Valium
The state of the options market continues to befuddle me to no end. The retail options ratio compiled into the ISEE sentiment was an eyebrow raising 112 yesterday - which means that retail option traders opened more trades with call purchases than with put purchases. On a day when the Nasdaq lost 9%. On a day which was referred to by blaring newspaper headlines as “BLACK MONDAY”. On a day where we had 98% downward pressure in equity volume.

And today, it came in much, much higher. OK, I’d expect it to do what it did today, but yesterday’s action just doesn’t make sense. Unless the ISE is on the fritz and made an error.

Similarly, the put call ratio from Chicago came in at 0.79 and 0.73, yesterday and today, respectively. Ho-hum. If you had just been given these figures you would never suspect that we had just gone through a stomach churning roller coaster ride. Would you?

Go figure that out and then come back and explain it to me (no really, please do).

TED Spread
What is another day if we don’t set another record. The TED spread pushed above recent high which itself was in multi-year record territory and closed at 3.5 points. For an explanation of this important fixed income indicator, see the link.

Dejavu, All Over Again
Here is a long term chart of the bullish percent for the S&P 500 Index (SPX):

bullish percent spx long term chart

Sure, we are back down where we’ve seen the market rally, but do you notice anything about the chart?

While the bullish percent has been hitting extreme lows, it hasn’t subsequently recovered to extreme highs. All it has managed to do is push back to the neutral zone. It hasn’t once in 2007 and 2008 (so far) reached +80-85% as it did during the bull market.

It only seems fitting on the last day of September to revisit the historical pattern that I brought up at the beginning of the month: Why you should write off September

No argument that it would have been much more profitable to have sold every long position at the start of the month and taken a long nap. As Tim suggested back then, you can always short… except when the government doesn’t let you ;-)

Don’t Spill Your Drink
I’m not seeing as much negative sentiment out there as I’d like. Take for example, the Hulbert measure of newsletter editors which is showing that market timing stock newsletters are absolutely sanguine about Monday’s drop. And they are more bullish now than during the spike low in July… even though the market is trading lower than back then.

My own anecdotal evidence comes from a cocktail party over the weekend where no one was at all concerned about the stock market, although most were familiar about the crisis and its effect on the financial markets. If anything, there were guests which argued that this was a great buying opportunity. Now, I know this is just anecdotal but when I look at the options market action (ISEE sentiment) I see parallels. And if that doesn’t concern you… it should.

Dazed & Confused
So I continue to be amazed at the action and watch cautiously, careful to not step into a sinking floor. We are seeing some good technical and market internal metrics build concensus towards a tradeable bottom. But I don’t believe we are there just yet.

As a caveat, you should know that I was premature in jumping aboard back in March when I saw indications which persuaded me that was an intermediate stock market bottom in the making. So perhaps now I’m playing it too safe?

Perhaps. Instead of second guessing myself though I prefer to stick to the most quantifiable measures and technical analysis, thereby removing as much “hunches” or “intuitions” as possible. I suspect that we will see today’s cosmetic recovery fade away and a cascade lower will bring much needed panic.

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5 Responses to “Snap Back Rally Arrives As Expected, Now What?”  

  1. 1 Trading System Development

    Your first section on option volume intrigues me.

    are you saying you have not seen this sort of action before?

    The reason I ask is because I have noticed that option volume can be quite telling, if market makers in particular are very certain of a turn in the markets. They will buy up options and futures, leaving the cash market alone

    I have only read this through studying Tom Williams, and in recent times seen it happen, even at the highs during this near market where put option volume was quite excessive


  2. 2 Tyler Lang


    I also noticed the Put/Call & ISEE putting in unimpressive figures and am as confused by this as you. Volatility has spiked, most other sentiment indicators are extremely bearish and yet this isn’t falling in line. The market rarely bottoms or tops exactly as it has done in the past. Perhaps this is the way that this market will leave chumps like us behind…while we wait for put/calls to spike, the market will take off. Only after the fact will we discover why it suddenly became obsolete. Or perhaps it’s not obsolete and there is still a lot of fear that needs to enter the system (i.e. another legdown).

    That being said, it feels like an LTCM is waiting to be announced. The quarter just ended and hedge fund results should be trickling in.


  3. 3 Babak

    Dean, yes this is unusual. The CBOE put call ratio can at times not coincide with panic but the ISEE certainly has - at least in its short history. But to clarify, I’m not looking at option volume but simply the ratio of puts to calls traded.

    Tyler, it is just weird. I’ve been in touch with Jason from who is a very smart guy and he also mentioned that he noticed it and can’t explain it. Others have contacted me to propose that it means that the public is now all of a sudden watching the sentiment data and therefore, preempting any sort of panic - making this indicator obsolete. Personally, I don’t buy that yet.

  4. 4 Tyler Lang

    Yeah, I don’t buy that argument either. I sent out a few emails also to some others and I’ll let you know if a decent thought pops up.

    That being said, the indicators are still at the bullish end of the range…just not super extreme. Regardless, it still felt rather like a washout on monday and a lot of other indicators are at extremes.


  5. 5 Tyler Lang


    I have asked a few friends about the P/C ratio not spiking and nobody has a decent answer. The best response I got was “You can always be sure of one thing in a panic market. The numbers and indicators like put/call ratios don’t matter much.”

    Did you get any insight from Jason at


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