Thursday, September 18, 2008

Sifting for Positives

Just about the time an investor feels exhausted by negative market news, everyone else is too. As humans we are wired to look at our past for guidance while the market is looking toward the future. That is why fixed annuity sales soar near a market bottom and investors borrow to buy equities near the top.

Make no mistake, there are very deep concerns in the financial systems and as we head deeper into recession I doubt the market has found its point of reversal. But whether looking looking for better entry or exit points, market sentiment measurements can help keep calm frazzled nerves or nudge us into action when otherwise paralyzed.

Two of the indicators most useful are the VIX index which I have written of before and is one measure of either complacency or fear and the PUT/CALL ratio. The latter shows when, in the option trading market, everyone has gone to one side of the boat or the other.

Today the VIX hit a level approaching the levels of 9/11, during the Long Term Capital crisis and the Russian and Mexican debt meltdowns. It seems to have reversed from the earlier highs of the day and changed a 140 point Dow decline into a 410 point advance.

The PUT/CALL ratio indicator is over two standard deviations above its normal level. If the past is prologue this is not a time to panic, but rather take measured and patient action. It might be a reasonable time to take a deep breath and relax.

We are still in a decidedly downward sloping trend, with underlying problems that are moving from the financial markets to the economy of main street. I suspect the current buying will be a trading buy and also there will be better exit points for rebalancing portfolios.