Finally, a huge overnight down move and follow through selling put the SPX with a loss of over 3% from yesterday's close at one point today. This felt like a bit of capitulation. The VIX went as high as 32, but closed around 27.5 giving another VIX spike buy signal. Today's candlestick as a classic hammer can offer a short-term bottom for the market, also.
Oversold conditions reached extreme levels lately. One of the rarest signs came from market breadth as discussed in a note from Larry McMillan. "Market breadth was poor [yesterday], and ... remain on sell
signals, deeply into oversold territory. With the “stocks only”
oscillator below –1,000, it’s in an area that is quite rare. There have
only been 17 days of readings below –1,000 since we have been
keeping this indicator (since 1994). Three of them have come this
year, two were in August 2011, two were last August, nine were in
2008, and there was one in May 2012. All of those were major bottoms in the stock market, at least for a strong rally." Some other oversold conditions are outlined in Urban Camel's blog last week.
With short term measures of volatility still elevated compared to longer-term measures, the market is still not ready to rally. SKEW came in elevated again today at 134. We need these to mark significantly lower to fuel a longer term rally.
With VIX high and big down days like today, very short term trades are possible for easy profits. The 1760/1750 SPX put spread with two days until expiration sold at $1.40 for a good hour today. With the market rally, it was back down to 80 cents by the close. These low risk trades seem viable to pick up some cash by month end.
