Behind the Market Headline News

Today's AAII (American Association of Individual Investors) bull and bear sentiment index are just another statistics that paint the bleak mood of markets. The Bears were over 70, an all time high level since the survey started 7/87, and the Bulls barely registered at 19, also a muti-year low. The difference between Bulls and Bears, a commonly used contrarian indicator based AAII survey, dropped below -50 (see the bottom panel of the chart), it only happened once in early October, 1990. Is the market bottom finally here? The bull-bear contrarian indicator has worked quite amiable in the past. If all the bulls have thrown in the white towels, we just might be at the bottom NOW.

Equity market experienced some major corrections in response to credit stumbles in Jan, March and July this year, VIX spiked over 30% in both Jan 22 and March 17, but failed to close above this perceived extreme reading in the latest equity sell-off in last two weeks. Many market pundits were expecting to see the spike of VIX over 30%, and which were believed to be the indicator that the market finally reached "capitulation" point and hence short term "bottom." The 30% has been regarded as such an important bogey might come from the observations that VIX pierced through the 30% every time when S&P500 index went through risk repricing (corrections) process since last August (see the chart "Historical VIX and SPX " below.) However, VIX didn't broke above this "magical" mark during the latest downturn ( VIX did briefly touch 30% intra -day on 7/15 though), the final indicator for the market bottom. Most of other market sentiment indica...