This bear market has shown just how nasty it can be. On Wednesday, new $SPX closing lows were made -- below the March and January lows. Then, on Thursday, new intraday lows were made. The Dow had already violated its lows last week. Selling spilled into sectors that had previously been strong; in fact, it was nastiest in those sectors. It was as if hedge funds and other large traders were saying, "Sell what you can, not necessarily what you want to." This is certainly a bearish development and opens up the downside for a whole new leg down, modulo any rallies that might spring up because of an extreme oversold condition.



The equity-only put-call ratios continue to remain on sell signals. The slight "wiggle" in the standard ratio last week was nothing to be concerned about. Even though these ratios gave sell signals back in late May, they still are not near the tops of their charts. Thus, they are not in oversold territory.



Market breadth has been terrible. Everyone is citing oversold indicators as reason for the market to bottom. We don't necessarily buy it. Yes, there is certainly the possibility of a large, short-lived rally. Given the oversold state of the market, it could easily be 200-300 Dow points in a day. However, that won't change the major trend (down).



Volatility indices continue to trend upward, which is bearish. $VIX made new relative highs, but is still lagging far below levels at which bottoms were made in January and March. The fact that $VIX has lagged is indicative of the fact that traders have not yet felt the need to buy out of the money ($SPX) puts in a panicky manner. They will, before this leg of the bear market is over.



In summary, our indicators remain bearish. Yes, an oversold rally is overdue, and it could be quite a doozy, for the declining moving averages are far above current levels ($SPX closed about 70 points below its declining 20-day moving average). However, unless our other indicators were to start to register buy signals, we look for lower prices after any such oversold rally runs its limited course.

Lawrence G. McMillan is the author of two best selling books on options, including Options as a Strategic Investment, recognized as essential resources for any serious option trader's library.