Stock Rally Fizzles but Does No Damage

After some initial fireworks in which stocks appeared poised to post a nice Fourth of July holiday rally, the action fizzled out. The day turned into a harmless sparkler rather than big bottle rocket. But I suppose the lack of any M-80-type "kaboom" can be taken as a positive, as little damage was done. Given the way the markets acted, I'd rather deal with a dud than watch it blow up and have to come in Monday on pins and needles.

The S&P 500 index did test the January low at 1257 and managed to finish the above important 1260 support level; so we have that going for us. But I think that we'll see a real probe below that price next week and that will provide a clue whether massive money on the sidelines is ready to become buy the dips. And not just traders looking for a snapback rally but buying from institutions that have longer-term time horizon and represent stronger hands in terms of holding positions.

The VIX dropped some 4% to $24.80, which still is a relatively muted level given the recent price decline and compared with levels hit back in the January and March lows. The put/call ratio hit an intraday high of 1.43 and finished at 1.15; this pushes the 10-day moving average to 0.91, its highest level in four months and approaching a bearish reading that is usually associated with an extreme or contrary signal. If the put/call 10-day MA can cross above 1.0, that might provide a reliable buy signal. On an intraday basis it would take reading in excess of 2.5 to indicate that the market is having a momentary panic and would be set up for a short-term bounce.

But as I mentioned before, my sense is this market won't see a spike or V-type bottom but rather form a U-turn. The bad news is there might not be any one moment when you can identify a bottom, so investors might be drawn into averaging down; that could prove costly and take more time than expected. The plus side is that you don't have to worry about catching the exact day the market will turn without feeling like you "missed" the bottom and the first 5%-10% of a move.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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