We have detailed many oversold conditions in the last two months, and in this article we’re going to look at a couple that haven’t been previously discussed. They are 1) the frequency of “90% days” and 2) Composite Implied Volatility (CIV) above 90%. Furthermore, we’ll review other general oversold conditions as well.
Sunday's overnight rally turned into a full-blown "melt up" by midday on Monday, as traders were literally in a panic to buy stocks. It was a "90% up day" nearly all day long. Very late in the day, the market started to decline, but then a whole new buying explosion occurred, driving prices to new highs for the day, and closing right on those highs. In the end it was a "90% up day" in terms of NYSE-based data and a "90% up volume day" in terms of "stocks only" data, just barely missing a full-blown 90% up day.
These oversold rallies are unbelievably strong – especially this one, which was preceded by three of four days in the “90% down day” category. Yesterday afternoon’s 45-point $SPX rally in 45 points was perhaps unprecedented, and now another 20 points have been tacked on today, as another afternoon rally is gathering strength. Makes one wonder who was selling previously, and where are they now?
...The equity-only put-call ratios have rolled over to sell signals, and that is a major technical factor, in my opinion. Technically, the standard ratio was not yet a “confirmed” sell signal, but it likely will be after today’s numbers are posted.
The CBOE has created “variance strips,” which is a way in which you can trade entire strips of $SPX options that are constructed according to the formula for determining $VIX. The beginning of trading awaits SEC approval.
These are primarily designed for professional traders, and many retail brokerage firms may not allow trading in the strips. Regardless, it never hurts to understand how various products work, for the knowledge may prove useful down the line.
Economic and technical worries have seemed to keep VIX at generally high levels for the entire last month. VIX has generally remained above 30 since first breeching that level in early August 2011. Each time VIX has retreated to the 30-31 level, it has jumped even higher, as the S&P 500Index (SPX) declined.
The main feature of the current market is high volatility. Even though $SPX has been contained within essentially an 80- to 100-point trading range (bound by 1100-1120 on the downside to 1200-1220 on the upside) for weeks now, the speed with which it runs from one end of the range to the other has kept volatility measures high.
Equity-only put-call ratios are beginning to look more negative. The weighted equity-only has rolled over to a sell signal. The QQQ ratio has already rolled over to a sell signal, too.
One often feels that the current market conditions are more difficult than he’s seen before, even though they’re usually not. It’s just that the past travails have been pushed further into one’s subconscious, perhaps merely because they’ve been survived. It’s like Army veterans fondly recalling basic training, when – in reality – it was a real pain when it was taking place; but a few years later, it doesn’t seem so bad.