Correction Underway

European debt fears, China monetary restraints, and other issues have finally led to a break in the low volatility run up of the last few months. I have been waiting for this pullback for several weeks. Sentiment levels had reached extremes seen at many other short term tops and the relative strength indicators had also reached levels of elevated risk. The pullback of the last few days has caused the VIX, or fear index, to rise 50% , over 7 trading days. Typically when the VIX has spiked like this ( we are currently 30% above the 30 day moving average..see chart) it has topped.

















(click on chart to enlarge)

I am looking to put money that I have pulled to sidelines back to work on this correction. The longer term breadth data along with the new high/new low data and other measures of market health suggest that this down move should only be a correction in an ongoing cyclical bull move. At today's low in the S&P 500 index we had already corrected 5% from the highs. I think we will bounce around and ultimately pullback a little further in the coming week(s) and I will be looking to scale back into positions as we do.


















One sentiment indicator that had become worrisome was the Investor's Intelligence percentage of bears. The number of bears in this survey had recently hit a five year low at 15% and as of last week was still hovering at 18%. On this pullback, I would like to see this reading spike back into the mid-twenties to 30% as a sign fear has returned. On a sentiment basis this would create a more favorable entry level.