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Today’s Market Plunge: The Road To Capitulation at Trader’s Narrative

As I’ve mentioned in recent weeks over and over again, the market is being driven by news more than anything else and we have not been anywhere near a washout capitulation. I also warned that the market has been not acting as if it is ready to bottom:

…we still have not seen full blown panic selling to completely wash out all the weak hands

In an ironic twist, Wall Street shaved $700 billion off its valuation after realizing that the US government wasn’t about to rescue it with a blank cheque for $700 billion.

I really didn’t predict today’s carnage, but I’m not surprised at all to see the Nasdaq falling -9.14%, the S&P 500 Index down -8.81% and the venerable Dow Jones down -777.68 points.

US dollar shock financial crisis

Almost every single metric known to technical analysts hit the redline. It is still too early to come to a definitive conclusion and I’m still looking at a lot of information but here are some quick facts:

During the day, volume flowing into declining stocks as opposed to advancing stocks on the Nasdaq hit an astonishing 80:1 ratio.

The VIX volatility index reached a high of 48.40% (and closed at 46.72%) to put that in perspective, that is higher than what we saw from this indicator in 1998 (45.74%)during another financial crisis.

The percentage of S&P 500 Index (SPX) components trading above their 50 day moving average fell to 9.60% - below the critical 10% threshold.

On the NYSE advancing stocks were a paltry 53 while declining stocks were 2,842. And on the Nasdaq, advancing stocks were a bit higher at 424 while declining stocks were 2,563. Volume flowing into declining stocks on each stock exchange easily registered as a Lowry’s 90/90 day coming in at 97% for the NYSE and 98% on the Nasdaq.

The only outlier was the options market. The CBOE put call ratio actually fell to 0.79 and the ISEE sentiment which measures retail option traders activity was similarly unimpressive. I have no idea why the options market showed absolutely no concern during a day like this. Very puzzling.

I can’t wait to see what tomorrow’s market brings. I’m still not convinced that we have the worst behind us but at least we can safely say that we are on the road to capitulation.

bailout smells like greed spirit parody

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4 Responses to “Today’s Market Plunge: The Road To Capitulation”  

  1. 1 Brandon

    Babak the only put/call ratio I use is the Total put/call ratio ($CPC) which is up 33% for the day. I’m guessing that when in panic mode people just opt for index options as opposed to stock specific ones.

  2. 2 Zlatko

    I’m not completely sure how to compute it using, but it seems to me like we got a Lowry’s down day followed by a Lowry’s up day today?

  3. 3 Babak

    Brandon, maybe but that doesn’t square with what we’ve seen historically. Why would things change in terms of the option traders behaviour and why so dramatically? and why now?

    Zlatko, I think we came very close but missed by a teensie bit… but don’t forget that Lowry’s also mentions 80% days in their seminal research report. If you haven’t read it, go to the “Free Stuff” section and download it - it is under reports.

  4. 4 anon

    I don’t know if you’ve mentioned this before as I haven’t searched your archives….but a common theory re. the put-call ratio is that with the introduction/recent liquidity of the Ultrashort Proshares, traders/investors have been using those to hedge risk rather than options. (makes sense at first glance.)

    But the converse is that I’d bet that many people (especially retail) have held onto SKF/QID/etc one day too many and got hammered by the 20% intra-week moves.

    Theory number two is that if you’re liquidating, you’re purely selling and not hedging.

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