Sharp Selloff A Buying Opportunity?

The market has taken a beating the last two days. This has served to relieve some of the stretched conditions I noted late last week. Most notably the CBOE put/call ratio and the VIX. (Note that the VIX system I shared Thursday afternoon triggered an exit today – good for a 2.43% gain in 3 days.) So now what? Is this a buying opportunity? Two days ago the market was hitting 4 month highs. The S&P 500 today closed about 3.5% below those highs. Let’s take a look at what has happened in the past when these kinds of sharp selloffs occur near a high:

The SPY rose 6 days in a row as of Monday. All six days have been wiped out in the last two. Looking at the 51 other such occurrences where the market has gone from a 50-day closing high to a 8-day closing low in two days, the positive expectancy going forward peaked after 5 days. A couple of weeks later, expectancy was nearly back to flat.

Here we look at a percent drop rather than an 8-day low:

Again a brief bounce that quickly peters out. I then combined the two. Only 12 occurrences but results seem notable. In this case the bounce only lasted 3 days and the expectancy beyond that turned quickly negative and stayed negative.

I ran some other tests tonight as well. So far I am not seeing anything that would lead me to believe there is a strong chance that the selloff has completely run its course.