Daily Options Report

You'll go broke back-fitting and overlaying charts from the past into current market charts so as to predict the future. They all deviate as every market is different.

But doesn't mean there are not similarities. We've seen thoughts how this summer reprised August of '87, August of 2001 and August of 2008 to name a few. And of course all lead to ugly Falls.

How about 2003 though? That quaint, innocent time of Grubman and Mushroom Clouds and tech stock implosions and silly low interest rates and a sick economy that many were convinced would never come back. And a pretty strong bear market rally from March thru the summer. Kevin Depew has these thoughts on the subject.

One of the harshest lessons I learned in financial markets was in 2003 when the bullish percents turned up in March and early April from very low levels. Then, as now, the calls were that it was going to be a short-lived "relief rally" from exhaustion levels and that soon the inevitable bear market would return. Four years later, that view proved accurate. Four years.

“Meanwhile, the summer of 2003 was brutal. The rally was relentless. The NYSE Bullish Percent ran from 38% in April 2003 to 86% by January 2004 without pause. It had reached the "red zone" area of 70% by June. Throughout the rest of the summer the rally continued to run ahead "on its last legs", "on fumes", "due for a pause soon."

“The bullish percents, remaining positive throughout that rally, should have kept me in the market, but I second-guessed them because I knew the fundamental case was terrible and there was no way to restart the credit engine. It's very similar to now.

“So, the bottom line is that the bullish indexes, having been positive this time since July after a brief turn down, and having moved from 20% in March when the reversed up to 78% now, are telling us that buying momentum is strong enough to keep moving stocks forward, generating buy signals in point and figure terms. Eventually, that buying power will be exhausted, and it appears that will likely coincide with DeMark exhaustion points being reached across the multiple time frames.”

Volatilility was at a similiar juncture in that options "seemed" cheap, yet they were anything but. That 4 years wait Kevin mentions was also a 4 year sink to ever lower realized volatility, culminating in readings in the 5 and 6 range.

Now I don't think we see something like that any time soon. In fact in the bigger picture, volatility probably remains in a trend higher. "Regimes" tend to take 5-6 years to play out. The trough in 2007 was the culmination of a move down from early in the decade. 2003 was closer to the beginning of that macro trade. On the other hand, 2009 is probably 2 years into a higher volatility regime.

At the end of the day, I think just having an open mind is the best. While I think it's more similar to 2003 than these other years right now, it's not going to be a mirror image.