Evidence that the Bounce is Nearby

We've seen this market fall far enough that, although it feels very had to do in this environment, it makes sense to start making up yours shopping list.  Indeed, most of the risk has been rung out of the market at this point. Below are a few reasons why I think so:

Sentiment
There are a number of sentiment indicators I watch to get a clue as to what investors are not only thinking, but doing. One secondary contrary indicator I like is the American Association of Individual Investors (AAII) poll; readings for the latest week came in as low as the bleakest points at the August and October lows of 1990! This extreme reading usually lead to higher stock prices 6-12 months out, as it correlates to throwing in the towel.

Another measure of panic is a gauge that may be less familiar to readers, one that occurs infrequently and has a good history of signaling climactic selling. Such a signal is given when a stock or index makes a new 12 week low early in the week, followed by a weekly close above Monday's open. It sounds arcane, I know, but it's often quite useful and given the way started the week by gapping lower, I expect many individual stocks to register selling climaxes this week as the Fed's 75 basis point cut is digested. The major averages themselves hold such potential, as well... we'll see how this week closes.

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Managed ETF Portfolios

Interested in Exchange Traded Funds (ETFs) but too busy to keep up with which ones might work best for you? The author of this week's Trader's Talk, Bruce Zaro, runs two managed ETF strategies for clients of Delta Global Advisors.

Investors interested in global market exposure through ETFs should click here to learn about his International ETF Rotation Portfolio. Through Zaro's research, investors gain exposure to what he deems to be the strongest foreign markets while avoiding those which are weakest.

Those interested in exposure to the healthiest sectors of the U.S. market should look at his Sector Rotation Strategy, as well.

Volatility
We all know the market doesn't like uncertainty. The CBOE Volatility (VIX) and the NASDAQ 100 Volatility Index (VXN) were born out of volatility, looking to measure volatility and provide a way take advantage of it. In the past 12 months we have seen an increase in dramatic market swings and these indicators have both spiked at important lows, albeit not at the elevated levels of a few years back (these need to be best viewed in the context of their recent levels... spikes are short-lived but broad volatility trends tend to be long lasting). As you can see in the 1-year chart of the VIX below, it spiked on Tuesday to the 37 level:

(chart courtesy of www.stockcharts.com)

...watch carefully here, as these spikes tend to last no more than a few days-sometimes one day, as may end up being the case this time.

Risk Levels
The New York Stock Exchange Bullish Percent (which my colleague, Chip Hanlon, described briefly yesterday) currently stands at 14.6%, the lowest reading since 1998. What it means is that only about 15% of all stocks that trade on the NYSE are in positive technical trends. Put another way: 85% of stocks have broken town, technically.  As Chip says in that article I link to above, the money that wants to be out of this market is probably already out; demand should have an easy time taking over and driving prices broadly higher very soon.

This does not mean the market will do an immediately about face and head higher in a straight line just because it's this oversold. Unlike the VIX, this indicator can very well might hang around these readings for a bit--remember, it's a risk level indicator not a market timing instrument. However, couple that extreme oversold reading in the Bullish Percent with the spike in that VIX index and there is reason to believe the bottom is indeed very nearby.

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Depth and Duration of Past Corrections
The morning's intra-day print took us even below the 20% correction level from the S&P 500's high of last year. The Dow was down more than 18% and the NASDAQ's fall has been nearly 25%! These represent very definitions of bear market territory, right?

How deep have past corrections been, particularly those surrounding significant economic slowdowns? I looked back into the 1960's ands found the average decline of such periods was 22.3%, typically made up of one leg down to reach about a 15% decline, followed by a bounce and then a final, additional 7% decline before the market headed consistently higher.

What does the calendar say about duration of these? The average time from a market top until a 15% S&P 500 decline is 122 days. (today marks the 101st day of the current correction).  Pretty close.

It is indeed a traders market, with higher volatility than we have been used to in recent years, but you can now start to play offense as it really feels we are very close or at a meaningful bottom.

All we need now are some bearish magazine covers and we'll be all set!

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