Sunday, June 19, 2011

In search of a bottom!

The stock markets have been selling off for the last 6 weeks and have barely had a green close this week.
Lots of people including many subscription based newsletters have been advising their readers to look at the long side of the trade again.
Some are saying the VIX has gone out of the BB and come back and that’s a sure sign of market rally. Some are looking at the high put/call ratio. Many are looking at chart patterns and technical Analysis to find the coming trend.

In my long association with the Stock Market, I have come to few conclusions and I base my trades on that. I do not believe that TA gives you any clue of the future. It just represents history.  I would be better off reading tea leaves. I also do not do day trading. Because I think it is like sitting on a rocking chair. It keeps you occupied but doesn’t take you anywhere. Moreover, when you are always looking at one minute or five minute charts, you tend to miss the big moves.

For a longer range trade I still depend on old fashioned fundamental analysis. But for trading purpose, I would rather look at market psychology. The stock markets represent the animal instinct and primal gambling nature of human being. Did you ever notice that there are more men than women in the field of speculation? That’s because men take more risks. Women make better investment decision although we men think we know better!

Stock markets are governed by greed and fear. And the pendulum swings between the two extremes. My measure of fear factor in the US Stock Markets is still VOX. Not VIX. VOX measures at the money options where as VIX measures out of the money options. VOX measures only the top 100 S&P companies which are more liquid and highly traded. In all similar selloffs / corrections where S&P has corrected between 5% to 10%, bottom has come when VOX has reached the level of 30%. Today it is still in the range of early 20s, which shows that while some fear is still there, panic has not yet set in.

And unless we see the panic, we would not see the bottom of this correction.
That is my humble view but market knows best and I can be very well wrong if we start a rally on Monday. After all it’s a double POMO day.
For me, I would still sell the bounce.