Leon then writes:
Objectively, take a gander at the weekly chart of the VIX, which is the most popular subject on Wall Street. Note how it spiked this week? Also, note that it shot above the upper Bollinger Band and the CCI is already in overbought territory. What this means is that volatility is overdone. Moreover, take a look at the chart showing the VIX3M vs. the VIX, which plunged sharply to 1.065 on Tuesday. This ratio has an outstanding record of identifying intermediate market bottoms. Note, when it dips below 1.00, it has coincided with correction lows. It doesn't take much for this indicator to drop below 1.00; additional weakness would drive it below 1.00 (see Chart 2). The correction is not surprising as mentioned in my previous reports, because of the overbought condition and the sharp rise in bullish sentiment, the market will likely consolidate/correct. Because of the strong fundamental backdrop and the market's bullish technical structure, my view was that the correction will prove to be more of a time/rotational one and not magnitude. This week, both technical and sentiment factors support this. In conclusion, refrain from joining the crowd. Additional weakness should be viewed as a buying opportunity as the secular trend remains powerfully bullish.
As for us, we think we made a "selling climax low" yesterday and that the subsequent throwback should be sharp. However, while aggressive trading types can attempt to trade the upside, we do not trust it and prefer to "sit on our hands" until things become more clear to us as investors. What should happen here is a throwback rally that fails and then a retest of the recent "lows"; and that should be it on the downside. This morning that looks to be what is happening with the preopening S&P 500 futures up some 14-points as we write at 4:47 a.m. Today is important because in the Monday crashes of 1987 and 1989, we experienced "Turnaround Tuesday" and traders will be watching for that.
Jeffrey D. Saut is chief investment strategist at Raymond James.