THE SCENARIOS ARE CRYSTAL CLEAR FROM HERE: 2 POSSIBLE SCENARIOS
One of the skills that children seem to develop quickly is the ability to find computer viruses that have no place on Earth, but somehow seem to find a way into your PC. Viruses that make you question how dark spirited the human race must be that these types of creations - only serving destructive objectives - actually exist.
I was planning on taking a look at some charts tonight. However, a virus managed to kill the PC that I use to create charts, screen captures. All the good stuff. I'm left with a MacBook that doesn't have the same software or capabilities while the PC is getting fixed. Fortunately, I can still post.
There are a few items of note:
1. Put/call ratios were literally off the charts today. There were individual equities that had 3 to 4 times as many puts being bought as calls. It occurred across all sectors. From tech to energy stocks. Investors were literally loading the boat with either protection or outright speculative shorts.
2. The combined put/calls hit stratospheric levels today. The equity put/call saw levels not seen since the catastrophe of 2008. Total put/call is seeing its moving averages move up to where it made the lows of 2010.
3. The most significant aspect of this put buying activity is as follows: The last time we saw this level of put buying activity was June of 2010. In June of 2010 it took a 14% decline and a 5 month low to make investors this bearish as expressed through put buying. In our current downtrend, it only took a 7% decline and a 2.5 month low to make investors load the boat with puts.
What does all of this mean? It means definition. Yes, definition. Definition is the best thing that an investor could have in a situation like this. By definition I mean that your risk is becoming extremely well defined at these levels as are the possible scenarios going forward.
Scenario 1: Given the massive amount of pessimism we are seeing before we even break the March lows of this year, you can assume that if a break of those lows does occur there will simply be too many people loaded on the short side to allow a successful breakdown. In other words, a break of the March lows should be bought hand over fist. It will be a fakeout. The snapback rally will be a sharp one.
Scenario 2: We do not break the March lows and begin snapping back up over the next few days. I believe that this will be the more confusing of the two scenarios as the markets will revisit the lows again the coming weeks to gut check the remaining bulls one more time.
Bottomline: Either way you look at it, your risk from these levels is extremely well defined. Barring a statistical "black swan" type of event, the odds of profit heavily favor buying into some long positions here. If you want to get fancy, you can wait for a break of the March lows, with the understanding that you may miss out if that scenario doesn't come to pass.
