Thursday, 3 July 2008

Bleeding Dry

FINALLY! The US has recognized that they are now in a bear market. They had to wait for the DJIA to drop to a 20% decline from the highs before they would acknowledge it. But guess what? According to another article tracking the state of the US market, more blood is to be shed.

Aside from looking at the bigger picture of the DJIA and the other indices, they also look into the volatility index, which is inversely correlated with the S&P 500 and serves as a measure of market uncertainty. The index measures the variability in options prices, which tend to rise as the fundamental backdrop becomes less certain. Of course, this means the opposite is also true: The index falls as complacency sets in, which is conventionally interpreted as a bearish indicator. So in a nutshell, extreme highs are interpreted as a bullish signal, while extreme lows are taken as a bearish indicator. In this case, the volatility index is in limbo. Since it's neither bullish nor bearish, it only means that this downtrend we're currently experiencing is not over. This could only mean that it's possible that we'll see the levels of 10,500 or even 10,000 for the DJIA soon.

A commentator even said that these days, a drop of over 100 points is already not nerve wracking anymore. In order for the market to rebound from this downtrend, what they'd like to see is that there would be a 500 point drop in one day to shock the people into going into the bullish mentality. I guess this would be their way of saying that things would be ridiculously cheap that it's going to be very hard to ignore them.

In our case, we only follow one of the Dow theories. The trend is presumed to be in effect until there is a clear sign of reversal. Right now, there is no reversal signal. So the bleeding continues for the market. To the permabulls, it's best to stay on the sidelines. For the other traders, short the weak industries like airlines and the financial sector.

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