Odds Favor Additional Promoting This Week (Possibly a LOT of it) | Buying and selling Locations with Tom Bowley

I have been watching the Volatility Index ($VIX) for years and it supplies us numerous essential alerts. A type of alerts 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 must be very cautious as we approaching this week.

Historical past of VIX Shifting Above 20

We have had loads of bouts with concern rising, even in the course of 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 alerts. You could not agree with me, and that is tremendous, however I do have conviction. With out conviction of the Massive 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!” At some point, the sky is falling. The following day, we’ve wonderful sunshine. How do you address it? Effectively, it is having a stable grasp of how the inventory market works. Worry comes and goes and it is measured in a number of methods. At present, let’s concentrate on the VIX.

The escalation of concern is what drives very speedy acceleration in promoting. If you happen to examine historical past, you will see that each important selloff this century has coincided with a VIX studying that soars above 20. However not each transfer above 20 leads to a significant selloff. Not solely can we must be conscious when the VIX strikes by means of 20, however we additionally want to appreciate that we’re at an important 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. Here 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 somewhat 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 instances that the VIX has damaged from the teenagers to above 20, signaling rising concern 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 by means of 20, the VIX alerts us one thing extra severe within the near-term. Here is an S&P 500 chart because the commerce warfare days of This autumn 2018, highlighting the extra severe VIX warnings above 20:

These examples had been far 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, understand 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 concern going to consequence like 23 of the prior such jumps and mark the underside now? Or will the concern proceed to escalate and ship costs decrease quickly? Effectively, there are not any ensures, however I consider it is prudent to consider that the chances of costs tanking this week, at the least for a pair days, is stronger than 33%.

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

Bearish Technical Value Motion

We solely want to have a look at the S&P 500 day by 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 necessary 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 might be MUCH extra brutal when worth help 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, relationship 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 (in the present day): -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 should 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 (in the present day): -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. Relatively, 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 necessary sign I comply with says this weak point will probably be short-lived and that the present secular bull market will return stronger than ever. The observe report of those alerts has been very robust for a decade. The opposite silver lining, nonetheless, 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 e-newsletter 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 further clues in our EB Digest e-newsletter, CLICK HERE to obtain this report proper now!

Blissful buying and selling!

Tom