Cover Short on Panic Days

If the report is bad I will probably go long for a quick snap back or short bonds.

Check yourself before you wreck yourself. More puts than during the LEH panic and 5 Million volume in Emini…. um… capitulation…

And…

And from Sentiment Trader:

The VIX shot up 35% to a one-year high. That has happened only two other times, both of which led to a gain in the S&P 500 of at least +8% at some point during the next three months.

10/19/87: +10.9% return, -3.7% max loss, +16.4% max gain
10/13/89: +1.0% return, -2.0% max loss, +8.1% max gain

(1) If the VIX gain was +25% or more, then the S&P rallied during the next three months 7 out of 9 times. The two failures were doozies – right before the crashes in ’87 and ’08.

(2) Thursday’s single-day Up issues ratio was less than 5%, which occurred after the 10-day ratio was already oversold by being less than 40%. Other than ’46, all occurrences marked very good risk/reward scenarios on an intermediate-term time frame for the S&P.

Next three months:

5/21/40: -1.6% max loss, +13.0% max gain
9/3/46: -9.1% max loss, +3.0% max gain
4/14/47: -3.0% max loss, +10.3% max gain
10/21/57: -0.4% max loss, +6.6% max gain
10/19/87: -3.7% max loss, +16.4% max gain

The S&P dropped 4% in one day when it had been within 2% of a 52-week high sometime during the past month.

Next three months (since 1950):

6/26/50: +7.2% return, -7.9% max loss, +7.3% max gain
9/26/55: +6.1% return, -4.3% max loss, +8.9% max gain
9/11/86: +6.7% return, -3.0% max loss, +8.4% max gain
10/13/89: +1.0% return, -2.0% max loss, +8.1% max gain
10/27/97: +11.5% return, -2.5% max loss, +12.5% max gain
4/14/00: +11.4% return, -0.7% max loss, +11.9% max gain

All six occurrences showed a gain for the index, with a very positive risk/reward ratio.

(4) Our Stock to bond ratio moved to -4 standard deviations. This is nearly unprecedented in the 50 years of history that we have. Here are the only other occurrences, and how the S&P performed during the next month:
10/19/87: +8.1% return, -3.7% max loss, +15.3% max gain
8/31/98: +6.2% return, -1.8% max loss, +8.2% max gain
10/12/00: +2.7% return, -1.8% max loss, +8.2% max gain

(5) Down volume on the NYSE absolutely swamped up volume, by a factor of more than 90-to-1. The instances below are the only other ones where the ratio was 90-to-1 or greater. Next three months (since 1950):

6/29/50: +11.4% return, -4.4% max loss, +11.5% max gain
12/4/50: +15.1% return, 0.0% max loss, +16.8% max gain
6/9/53: -0.1% return, -1.2% max loss, +5.3% max gain
9/26/55: +6.1% return, -4.3% max loss, +8.9% max gain
10/19/87: +10.9% return, -3.7% max loss, +16.4% max gain
10/26/87: +9.6% return, -2.8% max loss, +15.0% max gain
10/27/97: +11.5% return, -2.5% max loss, +12.5% max gain
2/27/07: +8.5% return, -2.5% max loss, +9.5% max gain
6/4/10: +2.4% return, -5.1% max loss, +6.2% max gain

Only one loser out of the 9 occurrences, and that was -0.1%. The risk/reward was, once again, very skewed to the positive side.

Cheers.

Volar