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Some Bear Thoughts, Crashes and Bottoms
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: March 12th, 2008 at 6:18 pm EST
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Deep in a bear market. You know it, you feel it, you see it. No denial. It’s been like this for months…sell the rips and buy the dips. That’s a characteristic of a bear market….not the bull market mantra of ‘buy high, sell higher’. As prices continue to erode, so does confidence…and patience is clearly thrown out the window. But we have yet to see such behavior from the sense of ‘giving up’. Rallies have been sold quickly…there is no such thing as ‘holding’ stocks any longer than necessary. Prices drop faster than a sinking ship, while the dollar tests new alltime lows. But why have we not seen a bottom yet? Can the market continue to cascade lower through all kinds of support? Let’s look at how sentiment can create buying opportunities.
Crashing through the window
Without creating much panic here, I wanted to analyze where/when we’ll see a market bottom, whether short term or long term. In an emotionally-driven market, the ebbs and flows of price move along a spectrum of fear and greed. We measure these movements with various sentiment indicators, the VIX being one of them. Historically, the VIX has been spot on as an indicator of extreme panic or complacency. The fear associated with panic is usually portrayed by an extreme VIX reading…in many cases we’ll see levels exceeding 35% before the panic turns to complete exhaustion (I’ve had enough, get me out!), sometimes higher. It’s at these times that the best and most opportunitistic trades are made…and the most profitable. Likewise, severe complacency with a low VIX has been a great place to be a seller…or even a buyer of that volatility.
Bottoms are Elusive
So what REALLY constitutes a market bottom? Shear panic selling, throwing in the towel? These are certainly characteristics, but I’ve found that the TIMING of such moves creates markings of a bottom. For instance, would a bottom be found with a market selling off early in the day or late in the day? We would likely find bottoms forming after an initial selloff and rally. This is a VERY RARE occurrence. Why is this? Buyers waiting for the panic to pick up stocks on the cheap. The old adage applies: ’sell em when they want em, buy em when the don’t’. We’ve seen panic lows that could be considered crash lows on many an occasion. Look for this type of behavior to washout sellers. We may not be far from it, but as long as sellers hit the bid on every rally, we won’t be near it.
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Bob Lang, Options, Stock Market
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