Fear grips the market as volatility surges. So what is there to do about it?

In our February 6th Stock Market ALERT we pointed out how quickly the market had reached such high comparative levels of down volume selling and “fear” (measured by the VIX) in the stock market the day before (February 5th).

In fact, the level of down volume selling in early February has only been seen a handful of times in the history of the S&P 500, usually after more significant downturns have already occurred or during more “mature” bear markets

We mentioned on February 6th that what had occurred was healthy for the markets, especially since these extreme levels of fear and down volume selling happened so fast within an established uptrend.  And, despite the level of fear investors had during the decline, we only resolved a very “overbought” condition seen in the chart below.  We will be discussing this in future newsletters, but “fear” is “fuel” for the stock market.

Before the early February stock market decline, most indices (S&P 500, Wilshire 5000, NYSE, Nasdaq, etc.) had reached a severe “overbought” condition on a weekly chart (see below), and something had to happen to fix this problem no matter what the “news” was that caused it in the first place.

S&P 500 Weekly Chart

What’s next with the Market

We pointed out in our last iInvest® alert that Rennie Yang from Markettells, a leading Quantitative Analyst observed that 99%+ down volume days, such as February 5th, are almost always a buy one year later, with an average gain of 25.5% (average loss -2.2% in 3/13 cases).

In our iInvest® Alert, we also mentioned that after such an extreme down volume selling day, the market typically (short-term) has one more test of the lows or even a new low before continuing it’s established uptrend, as the large impact of such extremes needs time to “work itself out”, and “shake out the weak hands” before continuing the established uptrend.  This is now occurring as seen in the chart below:

iInvest® remains bullish on an intermediate-term basis also.  Looking at indicators that measure overall “breadth” of the markets remain strong.  This can be seen in the S&P Advance/Decline Line making new highs, in addition to Leading TICK (a measure of institutional “smart money” buying/selling) is in positive territory.

As Rennie Yang (Market Tells) points out, indicators have also revealed a large amount of Institutional Buying on February 6th, the day after fear and down volume selling reached such extreme levels.  This can be revealed in the numerous surges in institutional (“smart money”) program buying throughout that day, all executed within a short amount of time.  Historically, when this occurs there should be a significant bottom nearby, if it has not occurred already!

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