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Four Gauges Give Wink to Hoofy


Come on, Sally-boy, step up to the plate!


Periodically, I like to revisit some of the measures I follow that tend to reach extremes when the market is near an inflection point. With all the volatility lately, it's time to look again at a few of them.

First, we see that the equity-only put/call ratio did hit an extreme in October, reflecting about as much put volume relative to call volume as we saw at other lows over the past two years. It didn't quite reach the depths we saw during the bear market, but then again we're not in a bear market (yet?). Bulls 1, Bears 0.

Next, we see that our SPY Liquidity Premium also hit an extreme a couple of weeks ago. Recall that this measure shows the relative preference for traders to concentrate on exchange-traded funds versus individual equities - it's an indication of uncertainty. When the Premium reaches the lower end of its range on the chart, it shows that traders have focused on the liquid and easily shortable SPY fund instead of the component stocks of the index. Bulls 2, Bears 0.

Third, total assets in the Rydex leveraged bear funds (which profit 2% for every 1% the S&P 500 and Nasdaq 100 decline) nearly hit a new all-time record. That's remarkable, given how little damage had been done in the major indexes. The last time assets became that extreme, it marked the very end of the 2004 slide. Bulls 3, Bears 0.

Lastly, odd lot short sales recorded several all-time record readings late last month. That pushed the 10-day average to an extreme never before seen. I think there are some valid reasons to distrust this data, but when we look at it on a relative basis (say, using Bollinger Bands), it has remained an effective tool. Bulls 4, Bears 0.

Most of the consistently useful indicators that I monitor hit an extreme in late October. The volatility we've seen in breadth and price has also been remarkable, and also nearly always coincides with the end of a market decline.

I can't really put my finger on "why", but I'm just not as enthused about this potential low as I have been about others over the past couple of years. I'm not aggressively long by any means, but from the looks of many of the things that I follow, we should be able to see more gains in the weeks ahead. I'm just not pushing very hard on that possibility.

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No positions in stocks mentioned.

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