The market can’t seem to shake off the European Debt crisis as stocks gapped lower at the opening selling off in big volume only to settle higher off the lows. Spain, Portugal, Ireland are all finding themselves under the debt fears sending shock-waves through the financial markets. German Bond yields reached never seen levels as market participants are fleeing to perceived safety. It wasn’t long before stocks were able to bounce off the lows of the day at extreme oversold conditions. Buyers lost their grip and failed to push the market higher at the close as volume was above average, but mixed overall. This market correction continues and it continues to punish those who try to fight it.
As obvious as it may seem we are quite oversold here at these levels and we could see a bounce. A sharp snap back is possible, but be ready for anything. Markets can remain overbought and oversold for very long periods of time. The past few years is an example of how markets can remain at extreme levels. An interesting note is the fear indexes we pay attention to and how they traded today in terms of the correction. Both measures hit extreme levels and were well off the highs of the day at the close.
The put/call ratio as reported by the CBOE began the day at 1.45 and closed at 1.16. Equity call options outstripped put options as traders were buying call options to pick a bottom. However, the last time the put/call ratio was this high was back on February 17th. It is an interesting indication of how much fear was present at the open, but as the day wore on many traders were trying to pick a bottom in hopes the market would rally. Perhaps we didn’t get the fear we needed for a market bottom, but we were close in seeing capitulation in the short-term.
Volatility reared its ugly head, as the VIX soared as stocks were sold hard in the first 10 minutes of trading. For now, it appears the index wants to work itself lower as the market continues to move through this correction. This time may be different than February where we will put in a lower high as it appears a lower high has a higher probability of occurring. As I have stated before every uptrend will visit its 200dma at some point during the longer term move. It is important we see a correction both in depth and length. Strong fundamental stocks can form proper bases and we can see big stock runs like we saw back in 2004 after that uptrend saw its correction. Stay patient here and wait for proper setups.
If we do end up correcting like in 2004 we are going to see very nice short setups in the near future. We are going allow the market come to us rather than us chase after it.