Sample Page Title

I have been watching the Volatility Index ($VIX) for years and it gives us a variety of essential indicators. A type of indicators is BE CAREFUL when the VIX strikes from the teenagers and into the 20s. In my expertise, transferring from 13 to fifteen is not the identical as transferring from 19 to 21. We noticed the latter final week and, if historical past is any information, we have to be very cautious as we approaching this week.

Historical past of VIX Shifting Above 20

We have had loads of bouts with worry rising, even throughout the previous 10-11 years of secular bull market motion. Sure, I consider we stay solidly in a secular bull market. I’ve stated it repeatedly, as a result of that is what I consider and what I see in my longer-term indicators. You might not agree with me, and that is nice, however I do have conviction. With out conviction of the Large Image, the market’s ups and downs will make investing/buying and selling emotionally exhausting. “We’re in a bull market! No, now we’re in a bear market!” Sooner or later, the sky is falling. The following day, we have now superb sunshine. How do you deal with it? Nicely, it is having a strong grasp of how the inventory market works. Worry comes and goes and it is measured in a number of methods. Immediately, let’s deal with the VIX.

The escalation of worry is what drives very fast acceleration in promoting. For those who examine historical past, you may see that each vital selloff this century has coincided with a VIX studying that soars above 20. However not each transfer above 20 leads to a serious selloff. Not solely can we have to be conscious when the VIX strikes via 20, however we additionally want to understand that we’re at a vital juncture short-term. In my view, the present secular bull market started on April 10, 2013, when the S&P 500 cleared earlier worth tops in 2000 and 2007. This is the chart that validates what I consider was the beginning of the present secular bull market:

The red-shaded space represents the final secular bear market, the place we actually had no new highs on the S&P 500 for 13 years. I consider it is slightly apparent to see that we’re now in an uptrend, regardless of a number of main bumps within the street. Since that 2013 breakout, I rely 36 occasions that the VIX has damaged from the teenagers to above 20, signaling rising worry that we want to concentrate on. Of the prior 35 occurrences, 23 resulted in virtually fast bottoms. That’s, in roughly 2 out of three occurrences, the VIX journey above 20 marked a big backside. Let me present you many 2019 examples within the following chart:

The VIX journeys above 20 did not final and, primarily, that preliminary shut above 20 marked the S&P 500 backside. However, in roughly one-third of those jumps via 20, the VIX indicators us one thing extra severe within the near-term. This is an S&P 500 chart for the reason that commerce struggle days of This fall 2018, highlighting the extra severe VIX warnings above 20:

These examples have been way more severe and promoting escalated quickly. Avoiding that short-term carnage would make an enormous distinction in a dealer’s account. By the best way, remember that the present secular bull market has withstood all 35 prior occurrences. On Thursday and Friday of final week, the VIX jumped to shut again above 20. However is that this newest spike in worry going to outcome like 23 of the prior such jumps and mark the underside now? Or will the worry proceed to escalate and ship costs decrease quickly? Nicely, there are not any ensures, however I consider it is prudent to consider that the percentages of costs tanking this week, not less than for a pair days, is stronger than 33%.

I’ve two causes that assist this notion of decrease costs within the week forward.

Bearish Technical Value Motion

We solely want to take a look at the S&P 500 every day chart to see the technical points current at Friday’s shut:

The VIX breaking above 20 is a warning signal, however I consider it is extra essential that the S&P 500 closed on its low on Friday on rising quantity. That is NOT capitulation. Actually, it reeks of additional promoting forward, till we see capitulation. Selloffs will be MUCH extra brutal when worth assist is misplaced with a VIX above 20. So technical points are telling me to be very cautious.

Historic Bearishness

Subsequent week is absolutely the WORST week of the 12 months traditionally, courting again to 1950 on the S&P 500. Whereas the S&P 500’s common annual returns are roughly +9% over the previous 73 years, take a look at the next annualized returns by calendar day on the S&P 500 over those self same 73 years:

• October twenty second (right now): -90.58%
• October twenty third (Monday): -5.14%
• October twenty fourth (Tuesday): -32.64%
• October twenty fifth (Wednesday): -36.65%
• October twenty sixth (Thursday): -56.01%
• October twenty seventh (Friday): -24.27%

These numbers are a far cry from the S&P 500’s common annual return of +9%.

And when you assume issues are higher traditionally on the NASDAQ, assume once more. Listed below are the annualized returns by calendar day on the NASDAQ since 1971:

• October twenty second (right now): -58.57%
• October twenty third (Monday): -46.02%
• October twenty fourth (Tuesday): -64.64%
• October twenty fifth (Wednesday): -25.00%
• October twenty sixth (Thursday): -106.39%
• October twenty seventh (Friday): -78.14%

Now I am not offering any ensures about worth motion subsequent week. Fairly, I am speaking about tendencies and possibilities. The VIX is screaming at us to be very cautious, worth motion is suggesting decrease costs forward, and historical past reveals very bearish tendencies within the week forward. Personally, I don’t ignore these warning indicators.

The Silver Lining

The first silver lining for me is that each essential sign I observe says this weak spot will likely be short-lived and that the present secular bull market will return stronger than ever. The observe report of those indicators has been very sturdy for a decade. The opposite silver lining, nevertheless, is that historic tendencies will quickly flip to the facet of the bulls. I will be offering a few of these bullish historic clues in our free EB Digest publication over the subsequent few weeks. EVERYONE ought to know these tendencies. And if you would like IMMEDIATE entry to a particular FREE Cash Flows report and obtain extra clues in our EB Digest publication, CLICK HERE to obtain this report proper now!

Completely satisfied buying and selling!

Tom