Surviving Market Volatility Again

This past week was a difficult one for markets.  That is probably an understatement, as the SPX 500 fell a stunning 5% during the week, the Dow Industrials dropped more than 530 points, or more than 3%.  It was the worst week in nearly a year and set the indices back to losses in 2015.  Seems like a big move, right?  It was ‘only’ 3%, but to put that into context – in 1987 the Dow Industrials dropped a similar amount, or 508 points.  But that was a massive crash, falling 22% in one session.  For the week, the Industrials lost about 1000 points, and it happened with amazing speed.

I was asked several times during Friday’s move as to where/when the slide would end, almost as if some were trying to exactly time that bottom or turn.  That is not my game, so I had to ignore the guessing, however when a market makes extreme moves in an emotional outburst you can pretty much void any support and resistance lines.  Looking for those are futile, because price will slice through those levels like a hot knife through butter.

We have been talking about the trouble of the markets for a few weeks now, and decided to be proactive and take on some protection.  Especially when it was cheap (it was just a week ago, with the VIX coming in at 12%). It paid off this week – bigtime.

Aside from the price action being as bad as it was, we saw some other statistics that were simply off the charts.  First things first.  Will there be a rally? Of course there will be a rally, but it’ll come when you least expect it – but being ready for it when the indicators hit extremes and waiting for it is the best tactic with options.  Yet, trying to time it is a useless exercise.  Wait for the turn, let it confirm and if there is a trend go with it.  Friday was certainly a 90% down day, and that sets up for a snap back rally.

First off, the McClellan Oscillators are as negative as they have been all year long, and certainly now point toward a reversal to come.  However, that won’t be anything to get excited about, the bears are leaning very heavily on this market.  I suspect some relief comes this week but it’ll be difficult to get on board with so much damage having occurred.

The VIX, which represents market volatility, had an incredible move over the past week, up over 100% in three sessions, reaching levels not seen since last fall.  On Friday, the VIX pushed higher by 46%, something not seen in years. The term structure is now forcibly going into backwardation.  The VIX is certainly spiking here and there will be an exhaustion and reversal, but again we’ll wait for it and not anticipate it.

The cnn fear/greed index has clocked in at 5, surprisingly not lower but still in very extreme territory.  The new 52 week lows list is off the charts, coming in Friday at 715 vs 10 new 52 week highs.  The three month chart is even more stunning, nearly 1000 new three month lows, the start of this time frame the SPX 500 was at an all time high.

The most damaging statistic here is the bullish percent, which is why it’ll be so hard to overcome this concentrated drop.  The line in the sand had been 50 (see chart), but when that busted the dam broke.  Bullish percent is a breadth number for point/figure chartists that measures the percentage of stocks within a particular group that are on Point & Figure buy signals.  Is a bottom at hand like in October? We are not quite there yet.  Maybe, but let’s wait and see it turn, first.  Anticipating and guessing just won’t get it done.