by Bob Stokes
Updated: February 08, 2018
By February of this year, investors had almost forgotten what stock market volatility looked like.
And then something unprecedented happened. On Monday, Feb. 5, the DJIA closed 1,175 points down, the biggest single-day drop in the index's history. Since then, stocks have been going haywire.
Was this spike in volatility unpredictable? Hardly. Our December 2017 Financial Forecast warned:
The CBOE Volatility Index declined to 8.56 intraday on Nov. 24, the lowest level in its 30-year history... As we've noted, the most placid periods of stock market activity are invariably followed by episodes of extreme volatility...
Sentiment measures had also been sounding an alarm. Here's just one chart, from our January 2018 Financial Forecast (Elliott wave-labeled version reserved for subscribers):
The chart of the 13-day CBOE equity put/call ratio shows that it has declined to .55, with the volume of calls nearly double the volume of puts. Options traders have not been this optimistic in 3½ years. So, trader sentiment is consistent with the optimism of fund managers, hedge fund operators and even the "little guys."
History shows that such optimistic extremes are contrarian indicators. Investors who heeded these warnings were not surprised by the volatility eruption -- indeed, they expected it.
OK. So, what now? It this 10% drop in the Dow a buying opportunity -- or the big reversal?
This is the big question, and the mainstream view is clearly leaning towards the bullish view:
Market optimists may turn out to be correct. Maybe it's just a bump in the road.
Then again, maybe sentiment measures continue to tell another story.
EWI's Robert Folsom just posted a special video titled "More Bullish Than Ever."
Then, make up your own mind about the bullish or bearish prospects for the stock market.
You'll find instant access details are below.
The February 2018 Elliott Wave Financial Forecast Short Term Update said this:
We know from our own experiences how tough a taskmaster Mr. Market is, which is why we constantly point out the importance of sentiment extremes in the context of a progressing Elliott wave structure.