Stocks broke their 7-week losing streak with the major indices now up some 7.5% from last Friday’s low. The question again is if this is a bear market rally, or have we put in the low?  Quick answer, we have certainly put in “a” low, whether it’s the low remains to be seen. 

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Last week, I noted that Options360 started to shift into some bullish positions as I thought a bounce could occur.  However, I believe the SPDR S&P 500 (SPY) will run into resistance around the $417-$420 level. So, with the SPY hitting $312 today. I’m moving to a more neutral stance such as establishing an iron condor in Walmart (WMT) and may begin looking for new bearish positions. I still think Apple (AAPL) could be a good short, above $150, so I’m keeping a close eye on the price action. 

One thing I and others keep harping on — in terms of finding “the” low — is the capitulation panic of indiscriminate selling, accompanied by a big VIX spike above the 40% level. I’m starting to think we might not get such a day; at least not anytime soon. I think we’ve already had a series of mini-capitulations across various pockets. Remember, for most of 2021, big-cap tech masked the total destruction of the speculative money-losing ‘disruptor’ companies. Hence, a large market swath has already seen a capitulatory crash. It’s just not showing up in cap-weighted measures that would normally show a capitulation “whoosh”.

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It could be that this level of selling pressure can remain elevated without hitting an extreme and can last for another few months as the SPY eventually works its way down to my $340 target.  This seems to be the scenario that the VIX is expecting. Looking at the term structure, one can see it’s fairly flat with nearly all futures contracts trading around the 28 level, suggesting expectations of volatility remaining elevated for the next 4-5 months.

Another area showing signs of waving the white flag is the steep drop-off in individual speculative trading, especially via the use of options. Call option volume by retail during 2020-2021 dropped back to near pre-pandemic levels.

To my mind, this all adds up. This rally is welcome, but temporary relief.  We still need to wring some excess from the market.  It just won’t happen in one day.

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