The levels of pessimism out there right now are a positive for the bulls. I’ve said that building a bottom is a process. Two indicators I watch for sentiment include the VIX – CBOE Volatility index and the equity p/c ratio. Watching them for extremes gives some insight to the bottoming process.
With this shocking news (BSC avoids bankruptcy by selling itself to JPM for under $300 million, when it’s stock price showed a value around $30 billion a few weeks ago!) out of BSC – Bear Stearns, the VIX spiked to 35.6. It reached 37.57 during the panic lows in January of 2008, and 37.5 in August of 2007. A chart is a chart, and this could end up being a double top for the VIX chart.
If you look back on the VIX a few years, the VIX reached as high as 45 during the strong selloffs of 2002.
The other indicator I watch for sentiment is the equity put/call ratio. I like to use the equity figures alone. You’ll get skewed numbers sometimes when the index figures are included.
The ratio has been over 1 lately. I’ve read an interpretation of the number, that says over .80 can indicate market bottoms. So when you get to 1.3 on the equity p/c it’s reaching a turning point. The longer it stays that way during the day, the better it is for the chances of a turn.
As with any market indicators, these are two tools to help traverse your way through the market, and should be used in combination with others in your trading arsenal.