I did not send out an email to my free email list yesterday morning, because I was not sure what the stock market was going to do. A lot of people were making big bold predictions on CNBC Tuesday after the nasty DOW dump about a Wednesday bottom and saying that you should buy, but I could not do that. I do not get mad at them. The reality is by talking the way they do they have created an audience who wants to hear such calls no matter what instead of hear the truth so they must deliver for them. Luckily the people reading these emails I send are much smarter than the average investor and stock market small fry.
What I did do yesterday morning was send an update to my private Power Investor group on an ETF that is holding up well during this drop telling me that it is setting up to transition to become a future market leader, because the stock market dump is showing us things. Now I do not think the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) is going to zero, but I do not think the selling is over yet.
Now yesterday the DOW did manage to go up over 100 points on the open so people did try to buy guessing a bottom right on the opening bell and others probably got enticed when the DOW went green, but then the market dumped on the close into the red.
No one can really predict the end of this drop – we can really call it a correction now – ahead of time. The only thing you can do is identify the bottom when it comes. My favorite indicator to do that with is the VIX volatility index (INDEXCBOE: VIX). It measures the premium that investors pay on in the options market for their calls and puts and spikes up in times of fear. The VIX is now getting elevated, but it is troubling that it fell into the red yesterday even though the market finished the day down.
I don’t care if the stock market goes up again off the open today. What I want to see for a confirmed bottom is a washout of fear in the market. The VIX signals that when it goes up 20% or more in a day and then reverses to end the day in the red. Hopefully it will do that today, but I cannot act like I know it will. I can only hope – and watch to see if it does.
Yes – I’m on a bottom watch, but cannot call a bottom yet – only when the VIX makes this type of reversal can I do so. In case you missed it I posted an interview on the site I did with Jim Goddard of www.howestreet.com about the current market action (how it is similar to some past drops) and gold and silver you can find here: