Sentiment Leaves Room for Questions

It appears that while I was attending a lunch hosted by the Chicago Board Options Exchange, during which a lot of time was spent discussing the VIX and the success of packaging it as tradable asset class, the wheels came off the market. The major indices closed at their lowest levels since last March, with the S&P 500 breaking the 1400 level to close at 1390.20.

Was this the washout that was needed? Let's check the sentiment gauges. Today's numbers shows the holes in using the VIX or its offshoot futures and options as a hedge against the underlying index.

The VIX rose 6% to 25.50, and while that is its highest close in six weeks, it still some 30% below the intraday high of 37.70 hit in August when the index spiked down to an intraday low of 1370.50.

While it's not unusual to for the VIX to make a higher low on the second time down or retest of a major low, the disparity or lack of lift in implied volatility today is disconcerting. The put/call ratio remained above 1.02 for the day, which pushes the 10-day moving average up to 0.91, its highest level in six weeks.

But the reading is still far from an extreme, and at this point, the direction -- both the VIX and put/call are trending higher -- smells like a bear, in which we'll see more downside over the next few weeks.

Remember, even though these gauges work with some 20/20 hindsight, it takes a reversal of the trend, rather than the absolute reading, to indicate a change in the direction of the market.

I don't think the Fed can save us, as the Bernanke team seems to have abandoned the promise of using rate cuts as a put or the plunge-protection approach to bailing out the stock market. And the early indications are that upcoming earnings season will not be delivering enough upside surprises or optimistic outlooks to turn this thing around.

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