Has the Panic Abated?

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Includes: SPY, VXX, VXZ
by: Prieur du Plessis

After the market meltdown on Monday and for the first part of Tuesday and subsequent reversal, Kevin Lane of Fusion IQ said:

We thought it would be wise to review our VIX deviation from trend (i.e. its deviation from its 50-day moving average) and Put/Call indicators to see what they implied. As seen in the charts below, the VIX deviation indicator from trend threw off the second highest reading it has given since 1996. Today’s reading was surpassed only by the November 2008 reading, which led to a 25+% rally over the following two months. Additionally our CBOE Total Equity and Index Put/Call readings were also very high.

Lane concluded:

Both indicators are suggestive of an overbuild in near-term negative sentiment and indicate that a counter-trend rally of some magnitude may ensue. Additionally we like that the economic bellwether Transportation Index held above key support near 4,045 (this also coincided with its 200-day moving average).

Click to enlarge:

Source: Fusion IQ, May 25, 2010.

Source: Fusion IQ, May 25, 2010.

Interestingly, the S&P 500 was down by 1.3% on Monday and marginally up by 0.04% Tuesday. However, the VIX Index was down by 4.4% on Monday and strongly higher by 9.7% Tuesday. “Are investors just apathetic at this point?” asked Bespoke. Time will tell, but the panic seems to be abating.

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