As I stated on July 15th, the S&P 500 looked as if it would test the 950 barrier and today that is the case. It will be interesting to see how this retest plays out. If we can remain above 950 I might be swayed to the slightly bullish camp even though I do not necessarily see it in the fundamentals. Retests like this are psychologically important because it can sway bears to stop being bearish or it can sway bulls to stop being bullish. That truly is a lot of what technical analysis is about, just the psychological defeat that ensues after failing to make a new level or breakout from a current channel.
One thing that I would like to point out today is the Credit Suisse “Fear Barometer”. This index measures the index skew for 3 month S&P 500 options. What this means is that they sell a 3-month call option out of the money by 10% and calculate how for out of the money they can buy a 3-month put option. Right now a 10% out of the money call option is able to purchase a 17.09% out of the money put option. This was as high as 18.8% back at the end of June 2009 which was about the same as the high back in June of 2008 before the market tanked.
Often people look at the VIX to support bullish or bearish support, but I think the Credit Suisse Fear Barometer is a much better gauge of market sentiment. If people in the options markets are bullish, then they should be willing to buy call volatility at a price that is comparable to put volatility. When they desire puts more than calls, as is the case right now, then they do not see a lot of upside and are more fearful of the downside. This particular index does not give me a lot of comfort going into the fall trading season.
Just remember that September and October have historically been bad months for the equity markets. Either this breakout above 950 will be the start of a sustained bull market or the next bloodbath is about to begin and this 950 level was everyone’s last chance to get out at a decent level price. It really all depends on if they economy is beginning to turn, or if some of the positive earnings were just some stimulus induced gasps for air. Only time will tell.