The markets dropped too far, too fast. The indices now look like they have finished wave 4. Today, the SPY put in an "Island Reversal" pattern. I doubt markets will go straight back up, and we should see a 5th wave move back down. Will it continue lower or be truncated? Only time will tell.
We are going to try to take advantage of the bounce trading on the long side. We also have published a list of stocks we think represent exceptional value. You can see them here: https://www.turbotrading.biz/member-blog (If you want to become a member, visit our Subscribe page)
The big divergence in the market right now is how the SPY bounced today (nearly 10%) and the VIX, and the ETFs TVIX and UVXW also moved higher. That tells me, most market participants think this is a "dead cat" bounce. For the mathematically inclined, here is the formula:*
In simple terms, the VIX is calculated using a "formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls." Using options that expire in 16 and 44 days. Normally, you would think of the ETFs as the inverse of the SPY. But at extremes, that model falls apart. As such, we see the VIX and the ETFs rising as the markets bounce.
The McClellan Oscillator also surged today with markets, getting back to zero after setting record lows. You would expect this type of broad market participation coming off the bottom like this as all stocks were hammered (only 2% of stocks are above their 40-day moving average). But there is only so much energy available in a bounce as the economic news is still going to be dire. Although we think COVID-19 will taper off and vaccines will be found, there is still a large degree of uncertainty. Markets hate uncertainty.
*Image source: Investopia