Market Update: Questions That Should Make Contrarians More Confortable

In the wake of the revolution in Egypt and Tunisia, the civil war in Libya, protests in Bahrain, Saudi Arabia, Iran, the massive earthquake in Japan, followed by a disastrous tsunami, followed by a nuclear incident, collapse of the Portuguese Government, the markets have rebounded like nothing happened, and in a matter of a few trading sessions, have reached there previous highs. Some markets, like silver, have actually been quite impressive: +15% in 6 sessions.

I have been asking myself whether my bearish stance was an error or not, and whether the decline and all the "buy the panic" talks that I am hearing didn't turn out to be a missed opportunity for me. The questions bellow — and their answers — lead me to believe that I didn't contradict myself. I didn't see any panic, and I still can't see one.
  • The S&P dropped 7% from peak to through and the last 6 days were up days. The decline was very modest and very much contain. To the point were it barely appears on the 3 year chart. Does it looks like a panic?

  • Volatility rose to 30% but does it show panic? See for yourself the 3 year VIX chart:

March 24 (Bloomberg) -- The benchmark measure of U.S. stock options headed for its biggest six-day drop since November 2008 as concern that this month’s Japanese earthquake will curb global economic growth eased.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 5.7 percent to 18.08 at 3:01 p.m. New York time, extending its retreat since March 16 to 39 percent. That’s the biggest decline over the same number of days in 28 months. The VIX would need to fall below 17.53 to beat the six-day record set two months after Lehman Brothers Holdings Inc.’s September 2008 bankruptcy sent markets into a tailspin.

This market is as remarkably resilient as any I’ve seen,” said Mike Shea, a managing partner and trader at Direct Access Partners LLC in New York. “We had a nuclear disaster in Japan and the Mideast two days from who-knows-what, and with that, you’d think the VIX would stay at 30.”

Global stocks advanced for a sixth day, the longest rally for the MSCI World Index since September, amid improving earnings and speculation the need for European bailouts may end with Portugal. Tokyo Electric Power Co. continues to fight to prevent radiation from leaking at a nuclear plant damaged by the 9-magnitude quake and resulting tsunami on March 11.
  • The Bullish Percent Index for the S&P felt a bit, but does that fall show any panic? See for yourself the 3 year chart:

  • The Put/Call ratio left it's highly complacent level (historically complacent, actually). But it merely returned to its mean, not showing any form of panic. Does the 3 year 20DMA PC Ratio chart below seem to show any panic?
As you can see, the mean wasn't even reach, and the PC ratio has yet again started its decline
  • Did treasuries rally, did people start flying out of equities/junk bonds/risky assets? See for yourself:
  • Did the dollar rally? Did the shorts start covering? Did the Euro start a decline?
  • Silver is up 50% in just 2 months and reached a new all time high. Is that fear?

If you have a different opinion, or if your answers differ from mine, please share them by leaving a comment.

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