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What Will Signal the Bottom?


Looking for signs of capitulation in options indicators.


Editor's Note: The following was written by James Kostohryz and appeared on Minyanville's premium product, the Buzz & Banter. It's being reproduced here for the bennefit of the Minyanville community.

A great many people, including myself, have been looking for signs of capitulation in options indicators such as put/calls and the CBOE Volatility Index (VIX). However, I'm now of the belief that put/calls and other readings of sentiment won't signal the bottom this time around. I believe these indicators may turn decidedly bearish after the lows are behind us and during a rebound. This may be the wall of worry necessary for a counter-trend rally.

Options traders are relatively sophisticated and most aren't brazen enough to be shorting the market at these depressed levels. That to me is explaining the lack of a spike in put/calls and the VIX. These same traders will probably be shorting into any rebound, however, and increased indications of buying puts and shorting interest may turn into a positive contrarian factor going forward.

In the meantime, I'm seeing plenty of capitulation in indicators of less "sophisticated" sentiment, such as the AAII weekly sentiment survey, where bearishness is off the charts (AAII bears are 70.27% - the highest ever) and participation is collapsing. The plain old price action is also showing capitulation.

So I'm buying here.

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