In any system devoted to a form of contrary opinion, there has to be a method to differentiate between vicious extended bear markets and what we’ll call normalcy. There is no particular technical difference between the environment of 2008 and that of mid-’09. In 2008 interest rates dropped precipitously and stocks didn’t care. Then like magic they woke up and recovered. To be safe we have to establish a rule based on the degree of weakness and then stick with it.
Such a rule will lag, by definition, but that can’t be helped. I have described post trauma windows which refer to SynVix2 and use a threshold level to reset. If that level is broken then I call it a trauma event.
You can see how we crashed through the threshold a few days ago which is a good thing – just like we saw in February and May. Now what we need to see is some bounce in this variable. If it gets stuck then eventually the 2 week average will fall below that threshold and bear market alarms will go off.
This is a long term picture where you can see the 2 week average breaking down below the threshold in 2008 – 2011. Sometimes it recovers but when that happens the level of SynVix2 is so high that buy quantities will be limited or signals cancelled altogether. In such cases, we have to wait for the SynVix2 to pull back before we get in – at least in any reasonable quantity.
Extreme bear market conditions are trendy while sideways and bullish markets are mean reverting. This switch acts somewhat like a moving average crossover of sentiment. This should continue to work because sentiment extremes are followed by bounces of some significance. If they are not then we have a problem. Such bounces should prevent the 2 week average from also going below the threshold.