As always, I'm looking for an opportunity to bet against the majority, especially when they either run prices up too fast or drive them down too far. I think we may be setting up for a nice buying opportunity here, but I will look to cut risk by swimming against the tide with options, but first, here is why I like my odds:
1) The Chicago PMI, Argentine situation and European weakness all augur for interest rates staying lower for longer. This is what Jeff Gundlach and Bill Gross have said repeatedly, and what I, too, believe will play out.
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2) EVERYONE has been calling for a correction of some magnitude, even former Federal Reserve Chair Alan Greenspan joined the chorus this week. When we get a big dip, as we have today (Click here for Thursday's market action) people that think this is the big one—either short the market or jump out. Either way, I like the idea that I'm not chasing hot stocks, but buying on dips, and selloffs like this provide that opportunity.
3) The volatility metric for the S&P 500 has jumped to the highest level since mid April when the S&P 500 traded down to $1814. That shows panic among some in the markets that did not have protection.
Futures for the CBOE volatility index:
August 14.94
September 15.30
October 15.55
November 15.86
December 16.06
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Spot VIX meanwhile is trading 16.38, which is 1.44 over the August futures. When spot trades above futures this is known as backwardation. Such situations are rare and show a sudden overwhelming fear has gripped investors. In times like this and under such duress investors create oversold situations in stocks and or indexes as too many people try to get out the exit all at once.
Lastly, the VIX calls to puts ratio is over 5:1, roughly 1.1 million calls (upside bets for higher volatility/lower market) against 185,000 puts. This is one of the most active days in VIX history, with well over 1.2 million options traded and an hour until close, so this too points to a zenith in fear.
I will caution that we have July jobs report due Friday morning (8:30 am ET), and absent more panic from Argentina or Europe, once that unknown becomes known the level of fear is likely to ebb dramatically.
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