No, That Wasn’t the Bottom…

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You know the falling stock market has warped everyone’s perception when folks cheer as the Dow loses only 250 points. That’s exactly what happened yesterday afternoon…

To be fair, the industrials were down more than 500 points by lunch. It took a rush of afternoon buying for the Dow to post a 1.5% loss on the day. The S&P finished down a measly 1%, while the Nasdaq Composite sprinted higher, nearly closing in the green.

Yet despite Wednesday’s bout of back-and-forth action, we haven’t seen any real panic during this grind toward lower prices. I’ll show you why in just a minute—and what to look for…

But first, all eyes are on the major averages. Everyone I know is pestering me about the stock market. They want to know if what we’re seeing right now is the beginning of the next big crash. Sunday afternoon, my father-in-law asked me how far I though the stock market would drop this week. I said the lowest it could go is zero.

He was not amused.

But it’s 2016. We don’t need cute little anecdotes of how many people in our lives are losing sleep over a crappy stock market. We have Google, for cryin’ out loud. The numbers can speak for themselves.

Bespoke Investment Group notes that Google searches for the phrase “bear market” is now tied for its highest monthly total since March 2009. And if my memory serves me, those were pretty bleak times…

The Bears are Back in Town

You could say folks are spooked right now. Can you blame them? The market has gone nowhere but down this year. The S&P 500 has been off by as much as 10% in 2016—and we’re only 12 trading days into the year.

So is it time to trade against the herd? Should we be buying while everyone is selling?

Not yet…

I want to remind you of the chart I posted on Tuesday. I told you that last week’s drop was inching the S&P closer to its October 2014 lows and how it could be big trouble if this level is breached. And despite yesterday’s big recovery, the S&P is starting to sneak below our line in the sand…

S&P 500

While yesterday’s rally off the lows covered an impressive amount of ground, you should not trust it. I do not think Wednesday morning’s lows marked a bottom. The main reason is because we still have yet to see a big spike in volatility.

While the Volatility Index (VIX) has been creeping higher to start the year, it has not given us a big capitulation spike. If you look back to late August, you can clearly see an angry VIX ripping higher as the market tumbled from its highs. Compared to those readings, the action so far this month looks downright ordinary.

CBOE Volatility Index

With implied volatility well below panic levels, you can see why we should expect more downside action in the near future. In order for the market to put in anything close to a short-term bottom, we need to see true panic. That means a big flush where folks are willing to sell at any price.

That’s what will set the stage for a real relief rally. Once the market beats the buy-the-dip mentality out of every man, woman, and algorithm, we’ll have a shot at higher prices.


Greg Guenthner
for The Daily Reckoning

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