Echoes are as Scary as the Real Thing

It appears that what we saw last week was an echo of the real scare of two weeks ago.  So, did that tsunami have another killer wave right behind it?  That was the fear that erupted last week.  But as we have noted, when you get the intense negative volatility that produces an OEX Volatility Index (VXO) reading of 44, it is almost always the peak in the panic, but you do often get an echo.  Sometimes, even the echo produces a deceptive lower reading on the popular indices, but you don't see the internals of the market (stocks making new lows) produce more negative numbers.

From a psychology standpoint this morning, we are interested in one of our most dependable psychology indicators - the Rydex Ratio, which is a gauge that looks at positions in long funds versus those in short funds and money market funds.

Click the chart above to view a larger image.

You can see that the small "speculators" have bailed out of their "long" positions, and now have more bearish bets than bullish bets.  No, this is not at bear market killing levels, but despite what you might be feeling, this correction does not even come close to looking like anything more than a correction.  In fact, it looks very much like the correction of last year (2010).  If you look at our Asset Allocation Model below, it is still saying the bullish incentive is much greater than the risks we are reading about in the papers and hearing about on TV every day.

We suspect that the volatility phase is NOT over, but we expect based on historical precedence, that we have seen the peak of the panic fear, and each echo will produce a little better set of economic indicators in its wake.

Click here to read today's full Market Comment.

Don Hays

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