The late-day surge in the markets was definitely something investors and traders wanted to see, reflecting the emergence of buying support at the recent lows. Market breadth was extremely strong on Thursday, with buying on very heavy volume, which helped to confirm the underlying strength of the rebound. The rally was broad across the board, with excellent gains in nearly all stocks.
For short sellers, there is now controversy. The Securities and Exchange Commission took the unusual step of placing a temporary ban on short selling, which is quite a surprise, as it regulates the movement of free capital in the markets and is a questionable response in our view, although it should help the stock markets until we see some stabilization return.
Technically, an indicator that I follow, the CBOE NASDAQ Volatility Index (VXN), a barometer of near-term market volatility based on option prices that is a contrarian indicator, has been turning higher in recent days. This points to a potential near-term bottom. A high VXN indicates maximum fear and a possible market bottom. A low VXN indicates reduced apprehension and a possible market top.
The five-day VXN to September 17 rose to 30.01 from 27.20 the previous week. The higher readings may point to a near-term bottom on the NASDAQ. In the broader market, the five-day S&P 500 VIX also increased to 29.65 from 23.33 the previous week. A sustained rise in the VIX could indicate a near-term bottom on the S&P 500.
The key for investors will be to see if stocks can follow up on the momentum that surfaced in late-day trading on Thursday. If so, we could probably say a potential bottom was formed.