So far the recent decline in the market has led to sentiment indicators reacting in a way that suggests a correction rather something worse, but we could see a rather nasty correction given how high the market got. AAII sentiment is at about 2:1 bears to bulls which has historically been in the vicinity of where bottoms take shape or at the very least a ST bounce. The put/call ratio has decidedly turned up but still has a ways to go to unwind the froth exhibited there, fund flows showed quite a large outflow this week, large enough to suggest a low especially since flows prior to the correction were quite modest. NAAIM is showing that active fund managers have reigned in their horns, but I'd like to see a bit more unwinding there given that it was at a historical extreme at the recent market high. A couple of other things are also holding me back from signaling an all clear. First is the lack of panic spike down and negative news catalyst. This correction has been taking place without a true discernable catalyst and that can possibly signal that the market is sensing something that is not widely obvious yet which means there could be a negative "surprise" in store which brings out more sellers. We also have to keep in mind where we are coming from. The market had a rip roaring move up which fooled even the biggest of bulls. There was indeed froth building up and it's still there with the likes of Tesla and such. Therefore, we could very well now have a correction that goes deeper than what a lot of people who missed the boat are expecting. Use your emotions as a guide. When the market was going up in August I had to really resist my impulse to chase it. If I was feeling it, I'm sure lots of others were too, who could not resist it and now they regret it. When the market goes down, it's the reverse. Those who are down on their positions cringe and are tempted to get out of them and eventually a lot do. Are we at that point where buying the market makes you want to cringe? Where it makes you sick to your stomach? Or are you looking at this dip as a great opportunity to buy and feel anxious that you might miss the bottom when the market shows any kind of strength? I don't think we are at the cringe point yet but we'll see what happens. There's this one trader who I will refer to as Mr. X. Mr. X has been a weak bull for the past several years. He's always been a great barometer of anecdotal sentiment with a knack of nailing bottoms whenever he has the words "protect your capital" as the main message of his post. We are not there yet. In fact, his post today basically said this: "although the market is correcting don't be surprised if a V shaped bounce developed as this has been the norm as of late". I know it's just one guy but that to me suggests that not enough weak trader types are scared enough. It suggests that FOMO is still there.
Now, I did indicate that it wouldn't surprise me to see the NASDAQ trade down to 10K. If that were the case, we would probably see the SPX go down more than the 10% I said I think could happen. As always, I will defer to the indicators and signals of the market. When I make a call on an index value I'm really just guessing. It could very well end up being that the market bottoms higher or lower than those targets. Don't be dogmatic and check your ego at the door. It is perfectly OK to change your opinions and do a complete 180 turn if warranted but that should not be solely based on the recent direction of the market. It's easy to be bullish when market is going up and bearish when it's going down but you would simply be deferring only to market action which would be the equivalent of driving by looking in the rear view mirror. '
Bottom line is that if we get any bounce from here I would be skeptical of it being sustainable. I would think that we would need to see more pessimism in the indicators and anecdotally, but like I said, it's heading in the right direction.
My next post will discuss what I think could be priced in the market and what may not be.
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