Thursday, October 16, 2014
The fact that the bull market lasted an extremely long 66 months is another reason for taking this high volume breakdown seriously as a bearish signal. More supporting evidence can be found in the fact that the Fed is ending its open-ended QE program this month. As I have pointed out in previous posts, the last two QE halts, in 2010 and again in 2011, were associated with big drops in US stock prices.
The prognosis is for a drop of 20-30% from the September highs. This would bring the S&P down into the 1400-1600 zone and the Dow down into the 12,000 - 14,000 range.
Bear markets are known for violent rallies which come out of the blue but are just temporary interruptions of the downward course of prices. I think one such rally has either begun or will soon do so from around the 1790 level in the S&P. But I think any such rally will retraces only about half the drop from the September highs before the bear market resumes.
The fourth chart from the top shows a five year history of the 5 day moving average of CBOE equity put-call ratio. You can see that the ratio is higher than it has been in two years. This is a warning that a rally is imminent but isn't much help in identifying exactly when it will begin.
The bottom chart show a 10 year history of the VIX volatility index. Very high volatility is generally associated with market low points. While the VIX is higher than at any time since 2011 you can see that it is still a fair amount below its 2010 and 2011 peaks and very far from its 2008 peak. Hopefully the VIX won't get anywhere that 2008 top in this bear market.
Both the VIX and the put-call ratio are warning that a big fast rally is likely within a few days if it hasn't aready started.