Panic!

This is the weekly version of Market Sparks. Here you will find items of general interest to active stock market traders. The weekly is free for all subscribers, alerts during the week are reserved for paid subscribers only.

THE BIG IDEA

Last Thursday, as many have pointed out, the stock market had its worst single day since the onset of COVID in March 2020.

And then the next day was even worse than that.

By now, the S&P 500 is down 17.4% in six weeks. If you feel like panicking at this point, you are really too late. Its something like when a hurricane is approaching the coast and people are advised to evacuate the area. Some people decide to stay and then have second thoughts when the water starts rising and the wind keeps intensifying. There comes a time when you are better off trying to ride it out than to attempt a panicked escape.

Some people - professionals and amateurs alike - are going to panic anyway. The truth is, one person’s “panic” is another person’s “beliefs”. I am not panicking! I just think the market is going to go down even more! As we write this, pre-open Monday, S&P futures are down another 4%. Why couldn’t we be down 6%? Or 8%? Or 10%? There is no magic formula to tell us in advance how big of a crash we are living through.

What we do know is that the swiftness of the market’s plunge and market sentiment are at levels that are usually seen at (or near) the bottom. Pick an indicator: put/call ratio, VIX, %b, AAII sentiment, Swingex index, Stocktwits “social VIX”, % of stocks below their 200 day average, McClellan oscillator. Nearly all of them suggest that the worst of the storm will soon pass.

(In fact those last two indicators still have not reached extreme levels.)

You might be right to sell at the market’s open today when it is down only 4% on its way to a 10% wipeout. The odds are tilting more and more in favor of a rebound, though, and the risk of panicking at exactly the wrong moment is rising.