On a day when the Dow surged over 600 points, it’s important when looking at the intensity of the recent panic and chaos in global markets to take a look at the big picture, so today King World News is pleased to feature a piece from one of the greats in the business who did an amazing job of calling Monday’s rally off the extreme panic lows as well as today’s massive rally in stocks.
August 26 (King World News) – This was the note Jason Goepfert at SentimenTrader after Monday’s carnage in the stock market. It has turned out to be incredibly accurate: “Similar to Friday, there are many different extremes and different ways to look at the panic selling that has occurred. We’ve seen a type of panic that rarely occurs, and when it does the pattern is to see some testing of the panic open over the next 1-2 days then a rebound lasting several days, then perhaps another test of the panic low….
Continue reading the SentimenTrader piece below…
Most of these lead to a multi-week rally. The type of activity we’ve seen does not necessarily have consistent long-term implications, meaning the contrary nature of this type of trading is usually limited to the next 1-3 months at most.
Like Friday, there are any number of ways to look at Monday’s trading activity. From almost any objective measure, it qualified as a crash, especially when looking at opening prices.
We’ve looked at this “VIX Sentiment” indicator a handful of times in the past few years, and it has worked almost without fail when registering an extreme.
Basically what we’re looking at is the probability that volatility traders are pricing into near-term expectations versus further-out expectations. The higher the indicator, the more these traders are looking for volatility to calm down. That means a lower VIX “fear index” and almost certainly higher stock prices.
Conversely, when these traders are expecting higher volatility (like they were as recently as July month-end), then near-term volatility tends to rise and stocks fall.
The chart above shows how the VIX and the S&P 500 have fared after other spikes above 4.0 in the indicator. History is limited, unfortunately, but at least the 2008 bear market is included.
Not surprisingly, the VIX was usually decimated in the weeks and months following these signals. The S&P, meanwhile, was higher a week later every time, averaging nearly +5%, and was at least +2.5% higher every time. That didn’t always last, so it was more of a short- to intermediate-term measure of extreme.
There are a large number of volatility-related extremes that triggered on Friday and Monday, most suggesting the same thing, that short-term moves will likely be exaggerated, but with an upside bias when looking at the next 1-3 months, and 1-2 weeks in particular.” King World News note: Special thanks to Jason Goepfert and SentimenTrader for helping to keep KWN readers calm during the recent storm. To try a free 14-day trial of the internationally acclaimed work that Jason Goepfert produces at SentimenTrader simply CLICK HERE.
***ALSO JUST RELEASED: Gerald Celente Just Warned This Is Not A Correction, It’s The Beginning Of A Total Market Meltdown And Global Collapse CLICK HERE.
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