Volatility and fear permeated the world markets today, whether it was stocks, bonds, or currencies. A mid morning sell off triggered by Europe took the Dow down about 140 points and a hint of panic was in the air. Volume was very heavy on the exchanges confirming the heavy selling. Once the initial spike down occurred, the stock market did stabilize then trended up for the rest of the day, finishing up slightly. The S&P 500 closed the day up .5% and the NASDAQ up .9%. Those that did panic were not rewarded, typical for the stock market. Generally when the market feels the worst is just when it will turn the other way, at least temporarily.
The fear in the market is confirmed with the put to call ratio, closing around 1.35. The higher the ratio the more protection market participants are buying, indicating fear of lower equity prices. The 1.35 close is a high number and could signal a temporary bottom for the market. The heavy volume with the reversal in prices also signals a “churn” day, another signal we use for temporary bottoms.
The extreme selling in the last 8 days makes it very difficult for the market to continue lower in the interim. Higher prices are likely in the coming days followed by a roll over that tests the recent lows. If the recent lows hold, there is potential for a tradable rally. A break of the lows will signal a continuation of the downtrend. Probabilities are about 50/50 at this point for either scenario but judging by the news flow and economic statistics we would lean toward the lows not holding. Therefore, we will look to reduce lagging positions and potentially further hedge the portfolio into strength.