Buying Climaxes As Small Traders Buy But Futures Gap Down

As we head into the new week, we're seeing the selling pressure from Friday bleed over, which is what has usually happened according to the type of behavior we went over in Friday's report.

Over the weekend, a couple of indicators showed notable readings. The number of buying climaxes among S&P 500 stocks shot to the 3rd highest level in 20 years, with 138 stocks hitting a new 52-week high then reversing to close lower.

The other two times we saw huge spikes in climaxes led to further losses over the ensuing weeks.

Also notable is that the smallest of options traders, which we touched on last week as being supremely bullish, actually increased their aggressiveness during the selloff. After spending a large proportion of their volume buying call options to open when stocks roared to new highs, they used the dip last week to become even more bullish.

We haven't seen this kind of behavior since 2010 - 2011, which led to further losses over the medium-term.

One of the positives on a very short-term basis is simply the fact that we look to be gapping down by a relatively large amount after having suffered bad losses on Friday. This is panic mentality that everyone has read about from the '87 debacle - Black Monday will never go away in some traders' minds as it has taken on mythical qualities. But when the futures gap down on a Monday after heavy losses on Friday, the next 3-14 days has been positive almost every time.

It suggests a bounce if we see selling accelerate into the open, but the large number of climaxes from last week, and the too-bullish behavior from overconfident investors suggests that whatever bounce we might get should peter out and lead to lower lows before a more sustainable bounce is likely.