Is the Market Stabilizing?

10/30/2008 11:00 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says there have been real signs of capitulation and panic lows in the market, and things may be settling down.

The intraday panic lows hit on Friday, October 10th could hold up over the next three months and as an outside possibility, could represent the lows of the entire bear market. We based this on what we viewed as outright capitulation during the opening minutes of trading with the Dow Jones Industrial Average plunging almost 700 points.

The intraday low hit that day and which now represent support are: 839 for the Standard & Poor’s 500 index; 7,882 for the Dow; 1542 for the Nasdaq Composite index, and 468 for the Russell 2000. We feel that this was the type of capitulation that could represent at the very least, a temporary bottom.

In addition to the heavy capitulation witnessed on October 10th, a number of sentiment indicators appear to also argue for at least a short-term bottom. Among those is the Chartist overbought/oversold indicator. On October 9th, it recorded a reading of -22.3%. Since 1964, when we began tracking the indicator, it has dropped below that level only one other time—during the stock market crash of 1987 [and it’s] almost twice what it was at the bear market lows of 2002.

It should also be noted that the number of new lows on the capitulation day were in excess of 2,900. We have been nowhere close to that number in recent sessions. It appears that despite the volatility, the market is beginning to stabilize

Another sentiment gauge that is reflecting a thoroughly sold-out condition—and one of the most oversold stock markets in history, are the recent readings from Investors Intelligence, the folks who track over 150 advisory services.

According to Investors Intelligence, the percentage of bulls dropped all the way down to 22.4%, the lowest percentage since it fell to 21.1% almost 20 years ago in November 1988. The bearish sentiment at 54.4% is the highest since December 1994. The difference between the percentage of bull and bears is -32%. The large gap between the two is extremely rare, only occurring in 1.6% of the readings since the survey began in 1963.

With the sentiment indicators at levels that have historically marked market bottoms, the obvious question is would now be a good time to buy? Our answer is no, due to the fact that our models remain in a highly negative mode—as well as the fact that stock market volatility based on Chicago Board Options Exchange Volatility index (VIX ) has soared dramatically. The VIX has closed above 50 for fourteen consecutive trading sessions.

Our advice is the same as it’s been since mid-January: stay on the sidelines in money market funds. Don’t even think about putting your money at risk until this volatility subsides.

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