Mixed sentiment picture : Why we'll take out the Jan lows.

There’s been a lot of discussion about the impending ‘retest’ of the January lows. Whether we’ll get a double bottom and the lows would hold. Or if we’ll go right through it.

• Traderfeed chimed in with some bullish divergences in a bear market setup.

• Bespoke comments that the PE ratio of S&P 500 has actually ticker higher.

• While the uber bull Trader’s narrative points out Hulbert’s Marketwatch article
  and the high put/call ratios,

• Larry McMillan actually points out that the ratio has rolled over to a sell signal.
  
  The equity-only put-call ratios rolled over to sell signals -- a condition we warned about in last week's newsletter. The actual rollover to sell signals came after last Friday's broad market decline. This is unusual for these intermediate-term indicators to reverse course so high on their charts, but they were correct to do so. Now, one must wait for new buy signals to set up, and that won't be easy. About the only positive thing that one might say about these ratios is that they are high on their charts, and as such, qualify as being "oversold." However, as we've often said, "oversold does not mean buy. Some of the worse declines come when the market is oversold."

• Ronald Daino argues that because of momentum, we’ll go through the lows.

Hmm.. so how do you make sense of this?

Two reasons why I think we could take out the Jan lows:

• Vix is in a decided intermediate term uptrend. Even though we are close to the Jan lows and actually at a multi-year low on a weekly closing basis, the Vix is still well off it’s previous reaction high of the Jan lows. (First figure)
  
  
• This whole credit cycle deleveraging has resulted in the unwinding of the carry-trade.
  The favorite currency for that is of course the Japanese yen. A yen rally has nicely coincided with market sell-offs. Notice the yen has already taken out the Jan highs, suggesting further weakness in the equity markets. (Second figure)

• The only caveat I might add is the fact that the yen rally could look exagerrated because of the dollar weakness, and probably the EURO JPY pair is a more accurate reflection of the current carry-trade deleveraging sentiment. In fact, it shows that the Jan lows are still intact.
  

Take your pick!