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What's Behind This Bounce?


Near term fear may be peaking but there is little else to legitimately push this market higher...

"I Thought I Thaw A Dead Puddy Cat Bounth"

After yesterday's seemingly routine late-day swoon, I guessed this morning would have seen a nasty gap down, some legit knee knocking, and the obligatory rally on the path toward maximum frustration. Mind you my level of confidence on that scenario had exactly $0 dollars riding on it, but it was the best Hoofy could hope for.

Not to be however, as the Minx started off in the green and is painfully trying to crawl its way out of a very steep and slippery hole. We can try to assign all kinds of reasons why the market picked today to put in a bounce, from the highly scientific "Turnaround Tuesday" theorem , to more mundane oversold indicators like the 3-day RSI on the S&P 500 (SPX) (a favorite of Prof. Goepfert), deeply oversold stochastics (not so helpful if the recent swoon represents a change of trend), or the fact that price has been hugging the lower Bollinger band for long enough to deserve a bounce. The one tell which caught my attention however, is the ratio of the SPX to the Volatility Index (VIX). I watch this closely because to the extent that lower prices engender "fear" my sense is that it is more useful to see if there are divergences between each separate level.

And lo and behold look what we have found here: even though the SPX sits meaningfully above the August lows, yesterday afternoon we actually retested those lows on the SPX/VIX ratio.

What does it mean? Empirically I don't know (I've lobbed the question to Prof. Goepfert to see if his data mining comes up with anything), and even looking at the charts since 1995 (95-99, 00-04, 05-07), nothing "jumps out". Intuitively however, I would guess that to the extent that traders are more fearful now than they were in August at lower prices, it may signal that at least from a psychological standpoint prices might deserve to bounce for longer than two hours.

We know however that psychology is only one leg of our stool, and with fundamentals uncertain at best (consumer / earnings), structural backdrop in near shambles (credit markets/over-leverage), and technicals needing to prove themselves in a big hurry, the burden seems to be squarely on Hoofy's back until proven otherwise.

After having covered much of my outright shorts in scale over the last few days, I am inclined to use Fib retracement levels to reload Boo's stash.
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Position in SPX, QID
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