I have had the opportunity to get on the floor of several exchange floors over the years and I always described it as organized chaos.  The Chicago Mercantile Exchange was always my favorite.  All the screaming and yelling, the hand signals and the energy at the Merc was always incredible every time I was there.

Over the last 10 days or so, I can’t help but think that the organized chaos has turned to complete and utter chaos.  The organized part has gone by the wayside.

The reason I say this is the insane volatility we are seeing.  This past Wednesday afternoon, I sat down with my lunch at 1:00 and the Dow was down 215 points.  Before the close at 4:00, the Dow had moved to positive 150 and then back down to negative 200.  We are talking about an index traveling a total of 575 points in the course of three hours.  And there wasn’t any significant news that came out during this time period.  This is the definition of insanity.

As an options trader I would normally welcome the volatility, but I prefer my volatility to be a little more structured than this. 

Option premiums have jumped sharply higher as a result of the increased volatility.  The VIX is a direct measurement of the premiums paid on S&P options and it is at its highest level ever, reaching 70 on Friday.

I have mentioned before that I run a nightly scan of overbought and oversold stocks in the Nasdaq 100 and the S&P 500.  I do this to get an overall gauge of the market and to look for potential turning points. As of Thursday’s close, 99 of the Nasdaq 100 were oversold (congratulations to Verisign on being the lone stock not oversold).  In the S&P 500, 493 stocks qualified as oversold.  These are unprecedented numbers.  I was not running this scan back in 2001 after the terrorist attacks, but I have to believe the week after would have been the only other time when the numbers would have been this high.

Based on the 10-month RSI, the Dow is now more oversold than it has been since 1974.  That is not a misprint.  It really was 1974 when the 10-month RSI for the Dow dropped below 18.  As of this writing, the RSI is at 17.40, it hit 17.01 in September of ’74.  This is the only other time in history it was this low.  Even in the Great Depression, the 10-month RSI didn’t reach these levels (the lowest reading was 20.32 in June 1932).

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The Dow dropped below its 200-month moving average last week.  The last time it closed a month below this trend line was June 1982.

I have focused on the Dow because as an index, it has been around the longest, but the S&P and Nasdaq are setting records too.  Last week was the worst weekly loss in the history of the S&P, both in percentage terms and point terms.

I am sharing a lot of historical data with you to make the point that the panic selling has reached epic proportions.  We are seeing unprecedented levels of selling.

I believe we will see a bounce and it will be soon.  I don’t think the market is going to turn around and go into a long-term rally, but I see it rising over the next few months. 

That being said, if you have been on the sidelines, it isn’t time to go diving in head first, but dipping your toe in would be the safe way to play this market.  If you didn’t change your portfolio six months ago, now is not the time to do it.  If you are 10 or more years from retirement, don’t go selling out of everything in your retirement accounts now.  In fact, now might be the time to increase your allotments to your 401-K.

If you are within 10 years of retiring, you shouldn’t have very much in the stock market in the first place.

If you have the patience and the fortitude, we could see another unprecedented state in the near future.  An unprecedented buying opportunity, but like I said, don’t go diving in head first.

Good luck and good trading,

Rick

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

[Ed. Note: Subscribers to Rick’s KISS Investing service recently closed out gains of approximately 154% on Gilead Science and 187% on Juniper Networks. Click here to learn more about KISS Investing]

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