Fear was in the air on Friday but was it enough?

I said before that we needed to see "white knuckle fear" to mark a bottom. There was definitely some of that Friday afternoon at around 2 pm. We saw the VIX spike to 29 and the put/call ratio was a very high 1.28. Then the market made a huge U-turn at 2pm and closed marginally positive. These are the sort of washout and reversal days that signal a selling climax. However, I'm a bit suspicious about this reversal. It may have been fueled by rumors and/or fears (for those who are short) about some sort of PIIGS bailout over the weekend. If you recall, the "blanket guarantee" against major bank failures by governments around the world took place over the weekend in early October 2008 which resulted in a massive 2 day rally.

The put/call ratio ended up closing at 1.21 which is very high and showed high fear even though the market ended up closing green. That's a very good sign of an impending bottom. Rydex data however continues not to show the type of rush out of bullish funds that was evident at prior solid bottoms. They are still only grudgingly heading for the exits.

Bottom line: More pieces of the puzzle are in place for a bottom but not all. Friday's reversal although encouraging may have been just due to short covering ahead of the weekend. However, the intraday low of 1044 could very well be bottom that perhaps may get probed a couple of times. I suspect base building will be required here. I know there's a few reasons explaining the drop we have seen in the market but I believe the major one here to focus on is the PIIGS problem. I think this issue is affecting markets the most. Serious structural concerns of a big country or group of smaller countries have in the past rattled markets. The Asian Contagion of 1997 and the collapse of Russia in 1998 come to mind. Only when those crises were dealt with did the market recover in a sustainable way. When the market gains confidence that the PIIGS concerns will be contained or dealt with, then we will see a very sharp rally. I'm sure the leaders of the European Union are not going to be complacent here especially after the 2008 meltdown. I suspect a bailout or some sort of support for PIIGS will be coming.


I realize that I may be waiting for everything to be just perfect before making the move for a long index trade which might cause me to miss the boat and it may very well happen....it has in the past. But you know what? That's fine by me. If I can't get strong conviction for a trade it makes me a weak holder subject to getting whipsawed very easily on an adverse move. The market is still quite compressed here and again we could see a bounce on Monday but I'm still going to be patient here.