Option Letter Daily

Things are pretty bleak on the major index stock charts, with the Dow Jones Industrial Average officially hitting a down 20% “bear market” from its October 2007 high (see the following chart) and over a 10% year-to-date decline in the S&P 500 Index. On the sentiment front, we have mentioned in our various commentary outlets in recent weeks that we have not seen the spikes in fear in the Sentiment Indicators that would indicate a panic bottom and subsequent rally is near.

DIA Daily Chart


For example, the CBOE Volatility Index (VIX) has not spiked to levels above 30, which may mark a short-term panic bottom (see the following chart). In addition, the Equity Put/Call Ratios have not signaled an inordinate amount of put buying. From a contrarian perspective, this indicates that investors have been rather complacent and are not panicking, which indicates we still have further downside potential.

VIX Daily Chart


However, on the other hand, one area that has shown some severe pessimism is among professional money managers. Should economic expectations change, such as through inflation worries cooling, these large money managers have plenty of powder on the sidelines that could spark the market to at least stabilize and possibly move higher.

This is seen in the Merrill Lynch Survey of Fund Managers from mid-June, which showed that portfolio managers have their biggest underweighting of stocks in a decade. In addition, just 1% of respondents to the poll believe that equities are undervalued – from my contrarian perspective, that statistic jumps out as a sign that we are near the bottom.

In summary, I view the overall technical/fundamental/sentiment situation as pretty negative. But one possible silver lining is the large amount of cash on the sidelines that can be re-allocated to equities should things begin to turn around or bottom out.

Price Headley is the founder and chief analyst of BigTrends.com.