By Paul Cherney
Here's a potential positive: Friday saw a high "end of day" equity-only put/call ratio at the CBOE, it was 1.086 (some of this has to be unwound). The caveat is: back in the week following the resumption of trading in September, 2001, the equity-only p/c ratio registered 4 out of 5 end-of-day readings above .99 while the market continued to drop during that week (but see ** below).
Here's a potential positive: Friday's total trading volume at the NYSE was the highest in its entire history at 2.632 billion. Caveat: during the first week of trading after the terrorist attack in September of 2001, every single trade day produced a day of total trading volume at the NYSE that made it into the top 10 days of trading volumes, (but see next bullet point **) .
** Here's a potential positive: If you measure the close of the S&P 500 at its discount to its own 200-day moving average, today's close put the S&P 500 at -24.77% (Friday's close was 22.48% below the S&P 500's 200-day moving average). Since 1986, there have only been two prior times that the discount to the 200-day moving average was greater than 21.5%:
• 1) 9/21/01 when the discount was -21.99%, on the following trade day, the S&P 500 gained 3.90% as of the close
• 2) 10/19/87 when the discount was -24.71%, on the following trade day, the S&P 500 gained 5.33% on a closing basis
During the previous excessively high discounts to the 200-day moving average, each one of those market events also carried a VIX reading of at least over 50 before there was sincere short-covering. These markets are so short-term oversold that little would surprise me in terms of rapid short-covering lifting prices.
I think the technical evidence is heavily weighted that we have either seen the lows (on Monday) for the beginning of a short-covering rally or that tomorrow morning could see an opening drop which clears the air overhead for a rebound due to a lack of sellers. I want to remind readers that the recent history of short-covering rallies is that they have been lasting only a trade day or a trade day and a half.
The VIX might have to jump above 50 to signal a capitulation (even just a short-term capitulation which would lead to a relief rally).
The VIX study I posted in Thursday's end of day comment, suggests high odds that whatever the S&P 500 close in on the day the VIX closes below its 10-day exponential moving average, that that price will be undercut on closing basis in the weeks that follow (8 in 10 odds, historically since 1986). My expectation for a short-term bounce in prices does not alter these historic odds.
I think I should point out that when the VIX does close below its 10-day exponential moving average, that means that price of the S&P 500 will have already started a move higher, (the VIX tends to move lower as equity prices move higher), it's just that this study slants the odds pretty heavily in favor of a staggered move up off the bottom (like a fighter trying to regain footing after a powerful combination, there could be some staggering and a grope for the ropes).
Cherney is chief market analyst for Standard & Poor's