Oversold enough for a bounce but downside likely not over

As I made mention in my quick morning posts, the market started the day whereby the potential for a short squeeze appeared to be in place at the open given the sticky VIX and a short squeeze appeared to have occurred as the SPX was up 11 points by 10:30 but then we saw a quick and vicious reversal to the downside which came out of nowhere. The explanations as far as I can tell were either 1) raising concerns about an earlier than expected fed exit strategy or 2) strength in the US $ (which could be a result of 1). Either way it happened and as I've been saying for about a couple weeks now, I think the market was vulnerable for an excuse to sell-off because it got overbought and nervous longs had itchy trigger fingers not wanted to let profits slip away. In addition to this, some measures of ST trader sentiment have become too frothy such as the put/call data.

ST momentum indicators are well oversold now which suggest a bounce could be in the offering. Also, the VIX has spiked quite nicely today which means the ST bullish froth is quickly being extinguished.

However, on the bearish side, the put/call ratio today was neutral therefore not showing any fear and one of the dumb money trader indicators I track which has been accurate all year pinpointing ST bottoms is still nowhere close to signaling a bottom. In fact, it’s in bearish territory signaling more downside because these traders were buying the dip today which is NOT a good sign. Mind you, sometimes this indicator is tricky because what sometimes happens is that these dumb money traders buy the dip correctly and then sell out and/or go short incorrectly on the first of many rallies flashing a buy signal on the way up from the bottom. That could very well happen again, but until it does I will NOT give these dumb money traders the benefit of the doubt.

Bottom line: Overall, I would have to say that there was too much complacency on today's dip which argues for more downside. Maybe we bounce tomorrow or Wednesday but unless I see more trader pessimism I will still be on guard for more downside. Bonds were also weak today which also suggests the worst hasn't been seen yet.

On a longer term positive note, I get the sense that a lot of people are bracing for a big correction i.e. the 10-15% type, while bears of course are still calling for Armageddon as they have been with every little dip since March. These are good signs from a contrarian point of view that the correction will be much shallower than people expect. To these people who are expecting a 10-15% drop I will say this....be careful what you wish for because if we do get a 10% correction I believe there will be a good chance for far greater downside and possibly an end to this bull run that began since March.