Bears Are 'Winning,' But For How Long?

Things have gotten pretty ugly, but a little over-bearishness can go a long way

Sep 28, 2015 at 10:20 AM
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Another Friday, another sell-fest. At least this one waited until the last hour. Pretty discouraging stuff all around. What we really need is extreme sentiment on the bearish side to turn things around for real. Anecdotally, it feels over-bearish. In reality? There are some extremes, but plenty of pretty mediocre numbers out there.

Bullish bets on the CBOE Volatility Index (VIX) hit relative records, as we recently noted, and that's good from a contra-tell side. The problem is that the VIX board is always tilted that way. And it's also apparently more a function of bearish bets in VIX ... or, rather, lack thereof. No one has much interest in casually getting in front of a somewhat slow-moving freight train.

And VIX itself isn't doing much lately. Twenty-two is modestly high, but very much in line with current market volatility. The VIX futures don't expect a whole lot going forward.


The slope looks big only because a small differential covers the whole graph. It only dips down to just below 21 around Christmas/New Years; otherwise, its mid-21s almost the whole way around. Very eh.

How about options? I'm not big on put/call numbers, or call/put for that matter. But hey, if you see a big rush to puts at the same time there's a VIX-plosion, at least it's a reinforcing data point. So what about now, with not a lot of VIX action? Here's the International Securities Exchange Sentiment Index (ISEE), which is a call/put measure:


ISEE only "counts" opening public transactions, so it's a proxy for the smaller player, presumably. It's on the low end, so there's a slide toward puts. But given the general ugliness around, I wouldn't call this much more than consistent with the overall trend. So, not much here either.

Well, here's one data point that suggests it's a little too bearish. This, from Bloomberg:

"Bears are winning out when it comes to daily U.S. stock trading.

"Volume on days when the Standard & Poor's 500 Index falls has been 27 percent heavier than the up days this month. That's about eight times the average gap in the past decade, data compiled by Bloomberg and Bespoke Investment Group LLC show.

"The volume disparity highlights the risk of more losses for investors who have been whipsawed in a market where stocks have alternated between gains and losses for 10 weeks. The S&P 500 has slipped back to within 3.5 percent of its August bottom, with a third of its constituents already breaking below those lows.

Bears are indeed "winning." But I'd suggest this actually bodes well going forward. Someone's unloading the boat on these ugly days, and will perhaps have to scramble and play catch up if we ever rally again for more than an hour.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research



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