MF Global Research Senior Equity Index Analyst Nick Kalivas said in a research note this afternoon that technically, the CBOE put-to-call ratio and the VIX (CBOE Market Volatility Index) have not exploded to levels or shown signs consistent with an equity-market bottom. Amid the stock market’s biggest one-day rally in two years on Tuesday, the VIX dropped 11 percent to 44.37, its lowest reading in almost a month. The index measures the cost of using options as insurance against declines in the S&P 500.

“Sentiment is very bearish and investors are carrying a large amount of cash,” said Kalivas, noting that the NYSE advance/decline line is one indicator which is “friendly for stocks.”More from Kalivas:

“The spread between new highs and news lows is very negative, but not at the level seen during the fall (2008) low in the S&P 500. The divergence between the advance-decline line and the S&P 500 is potentially bullish. The A/D line did not make a new low, while the S&P 500 did make a new low. This suggests the breadth of the decline is limited, and the market is sold out. It should also be noted that the NDX did not make a new low with SPX. This is another sign of potential strength. The foundation for an equity rally would be stronger if the CBOE put-to-call ratio and the VIX had confirmed bearish sentiment levels and the A/D line. Despite the sell off, panic was not extreme in the option market. Some are discounting the VIX and put-to-call ratio. It is possible that that (the) market rallies without these indicators, but a major rally without these indicators has been unusual or an exception to the rule. The level of cash on the sidelines is bullish, but naïve analysis may not be applicable.

Unemployment is soaring and causing households to hoard cash to pay bills and live. Even though economic numbers have been be dismal the last few quarters, the impact of growth on the street, especially middle- to upper-class workers, is now in full swing. I hear/see stories of people being affected by job loss and reductions in income. It is now starting to impact spending habits. Cash levels are going to stay high until the labor market improves.”

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