This market is now presenting a difficult choice. It has continued to gain ground almost every day, adding to its overbought condition (the "stocks only" oscillator is above +600, for example), and it is right at the top of the trading range. In addition, futures traded up 7 points or so overnight. In the past two months, these conditions would be screaming for a sell, and indeed the market is having its worst day in a while, by far, today. However, this seems to be a very delayed reaction.
The pace of the recent rally was such that the market is now short-term overbought. For all the movement, $SPX is still within the confines of a wide, volatile trading range -- which now extends from 1070 to 1230. A breakout above 1230 would be bullish, although there is more resistance at 1260.
Equity-only put-call ratios aren't as clear as they sometimes are. The weighted ratio has moved back to a buy signal, but the standard ratio really hasn't.
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.