Well, we hit the 1000-1010 downside target I was calling for. Market is now extremely ST oversold but based on experience, such extreme ST oversold readings registered on the first downside move off a top are often false signals. Quite often, what you see is either an immediate lower low the next day or a reflexive bounce/sideways action for 1-3 days followed by a lower low. Either one of those senarios is probably what's going to happen here. The fact that the market stopped at 1000 it too convenient/predictable...it needs to feel sloppy/desperate...i.e. bulls need to be sweating more.
I'll tell you one thing though; bears are once again dancing in the streets as if the market crashed 15%. Every time we've had a minor correction since March they've been doing this and every time they've turned out to be chumps. And look at that VIX spike up today to 29! Fear is in the air....there's no complacency with today' action that's for sure. Apparently there were rumors of an immanent major bank failure which may have helped to trigger the drop. I don't know if that's true but what I do know is that the market was vulnerable to a drop like today and although I wasn't gun-ho about the short side I did warn about the dangers of the long side and that the best thing to do was nothing....well, I suppose the best thing to do would have been to go short but not losing money on a day like today isn't so bad.
This latest top looks a lot like the top in June if you look at the charts however there's 1 big difference...the behavior of bonds. Unlike in June, we didn't see a significant run up or spike in bond yields leading to this top. I pointed sometime before that a run up in bond yields (sell off in bond prices) is one of the things I look for to confirm an IT top. The larger the run up in bond yields the bigger the correction. Since this time bond yields were actually in a falling trend for the past couple of weeks it suggests that the downside potential of this correction will be less then that of June's. Keep a close eye on bond yields. If we see bond yield drop sharply that could provide the fuel for another big leg up in equities. If yields rise while markets drop that's a bad sign.
When I was watching BNN (The Canadian equivalent to CNBC) this afternoon they had on a couple of fund managers who were asked how big of a correction they expected. One guy said 25% the other was calling for 900 which is about a 15% correction from the high. Based upon this and other sources, the consensus it seams is for at least a 10% correction. Remember what I said about the "ideal pullbacks" and a 10% correction at this phase of the bull run. Thus, I'd be very concerned about a lot more downside if we got the 10% correction everyone wants. But it's looking like to me that this correction will be shallower than people expect.
I'm thinking 970ish is as low as it will go. The current 50DMA of the SPX is at 965 and rising and so a test of that fits with my target.
Bottom line: So long as the SPX doesn't close below 940 I still believe markets are in a consolidation phase. The big spike in the VIX, celebration by loser traders on marginal downside and low bond yields suggest the correction we are seeing will be milder than the June correction which was about an 8% drop from the peak. So far we are down 3.5% from the peak. A drop to say 975 would be about a 6% correction which to me seems about right. I'll be taking this 1 day at a time as always.
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