However, what we did see on Monday was a big flush out in the market. This was the reset we have been talking about for a few weeks after we got overbought. We had a 90% down day on the NYSE with a huge expansion in 20 day lows across all markets. The chart below from index indicators shows the expansion of 20 day new lows on the S&P 500. This was coupled with a spike in the put/call ratio and the VIX index. The VIX traded at the highest levels since the Jan/Feb sell-off. Recent history suggests market lows coincide with oversold levels as the put/call and VIX spike. Will history repeat itself? We have no way of knowing the outcome. If the Greek issue is resolved and somewhat contained, we imagine we are closer to making lows. The risk is the fear of a contagion that could really bring in some volatility and much more downside. It remains a very fluid situation.
If we look at some breadth indicators we can see we are approaching areas on a longer time frame that historically coincide with a bounce in the market. The % of S&P 500 stocks above their 50 and 200 day moving averages is nearing those anticipated bounce levels. Now, in an extended move lower such as the European debt crisis in 2011 these indicators can stay oversold for much longer periods.
From a longer term view the S&P 500 is in danger of breaking below the up-trendline from the 2009 lows. A significant break of this support area could also bring in a bigger correction.
The markets have some long term support coming into play as we reach short term oversold levels. These areas have been opportunities to add to long positions in the last few years because of the frequent V-bottom formations. However, there's always the chance that this is the beginning of a bigger correction and a V-bottom is not in store this time. We are willing to be patient to see how the trend resolves itself.
