Lack of fear can be a relative term.  It certainly is in the case of the recent market reaction to the latest moves in the major indices and the economy.  Think about it.  Given the situation presented to investors over the past month, we should almost see them crying in the streets and selling everything in their portfolios.  But that’s not the case, as we continue to witness optimism among the key sentiment gauges. 

What does this mean?  Well, it means that the worst is likely yet to come.  We’re still waiting for a sign that investors are truly capitulating instead of hoping that the economy will miss a recession.

Capitulation … true capitulation, that is … is combined of two things - massive selling accompanied by extremely high levels of pessimism.  One without the other can identify a short-term buying opportunity.  But given where the market is right now, a true bottom is not likely to be drawn until both of these events happen at the same time.  Today’s Market Brief (below) discusses the concept of relative fear in the CBOE Volatility Index (VIX).

To date, we’ve seen some pretty impressive selling (and buying … at least on Wednesday).  Investors have taken situations that might otherwise have marked the beginning of a short-term rally and sold into the market’s strength.  The resulting technical patter is a market making lower highs and lower lows amid a trend that has clearly shifted to the downside.  We warned about this situation a month ago, when selling started to increase while investor sentiment was reaching some relatively optimistic readings.

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Now the market has careened through technical support levels without much of a sign of rising pessimism.  And that’s part of the ongoing problem.

When investors fail to react to signs of impending selling, it more often than not does nothing more than delay, and possibly magnify, what is bound to happen.

The Nasdaq 100 Index (NDX) moved below its 20-month moving average last week, offering further evidence that the selling has become indiscriminate.  The NDX represents the 100 largest non-financial companies traded on the Nasdaq.  You know, the Apples and Googles and such.  The same companies investors flocked to as a safe haven not too long ago. 

A few months ago, we said that we thought it was scary that big-cap tech companies were seen as a destination for a flight to quality.  Now the market is reaping the dangers of this situation.

While a few groups remain somewhat attractive from a “quality” perspective, investors would be wiser to hold their cash until the current volatility hits a crescendo.  And I say that despite yesterday’s remarkable turnaround.

Have a great trading week.

CJ

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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