Adam Hamilton, one of my favorite financial analyst and newsletter publisher published the following analysis this Friday evening:
[...]And John Hussman:
Note today that despite the recent sharp SPX selloff, the rVXO has merely climbed to 1.14x at best. This is still well below the midpoint in this indicator’s secular trading range! Last summer’s SPX correction saw an rVXO peak near its end of 1.53x, and the last pullback in March 2011 went as high as 1.39x in the trading week surrounding the SPX’s bottoming. So just like in absolute terms, also in relative terms the VXO remains too darned low to signal the end of this selloff. Fear just isn’t high enough yet.
The bottom line is trading stock fear yields the best buying opportunities within any ongoing bull market. Traders can only expect to buy low when everyone else is scared and selling, driving down stock prices to bargain levels. The implied-volatility indexes, particularly the classic VXO, offer the best way to objectively measure collective fear. Waiting for levels where past selloffs bottomed leads to great buying ops.
And today’s stock-market selloff, though substantial, has yet to get anywhere close to the fear levels seen after the rest of this bull’s pullbacks and corrections. This means sentiment is not rebalanced yet, hence more selling is highly likely to spark the necessary fear levels to eradicate residual greed. So be careful here, don’t get suckered in to the countertrend rallies until the VXO signals fear is high enough to buy.
Despite the short-term oversold condition of the market, I should be clear that we are presently observing a combination of evidence that is typical of early bear markets - having some potential to be reversed, but with a generally dangerous record overall. This evidence includes the present combination of unfavorable valuations and unfavorable market action, developing concern from the most accurate version of our recession warning composite, [...] a recent advance that has already passed the historical norms for extent and duration of cyclical bulls within secular bears [...], and the neutral intermediate-term but hostile longer-term evidence we observed at the early May peak [...]. All of this presently holds us to a generally defensive investment stance.Wait & Pray