We just got our second Volatility Index (VIX) sell signal of the year.
Sell signals occur when the VIX closes below its lower Bollinger Band, and then closes back inside the bands.
That happened on Friday.
We went two and a half years without a sell signal. Now, we have our second one in four months.
And that’s a bad sign for the rest of 2022…
You see, unlike VIX buy signals – which play out immediately and tend to last a few weeks – VIX sell signals usually play out over the course of a few months.
For example, back in 2018 and 2019 the one sell signal we got each year led to an immediate 100-point decline in the S&P 500.
That was about a 2% drop – which is no big deal, especially in today’s environment. Following that move, the market bounced back and made new highs.
The real damage from the 2018 and 2019 sell signals came about three months later.
That’s when investors were hit with a 16% loss in December 2018, and a 29% decline in March 2020.
The sell signal we got this year in late March, played out a little differently…
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The stock market actually managed to rally for a couple of weeks after the signal triggered.
Then, the selling started and the S&P 500 lost 20% over the next two months.
As I mentioned, on Friday we got another sell signal.
Take a look at this VIX chart…
There’s no way to know for sure how this signal will play out.
Maybe stocks will rally for a couple of weeks like they did in March before they get hit with selling pressure.
Maybe the market will fall modestly right away, and then bounce again before the real damage happens a few months later (like in 2018 and 2019).
Or maybe we’ll see something totally different this time.
No matter the case, VIX sell signals tend to do a lot of damage to stock prices.
Keep that in mind – especially if stocks rally following the Federal Open Market Committee (FOMC) announcement on Wednesday.
Best regards and good trading,
What’s your prediction for how this sell signal will play out?
Let us know your thoughts – and any questions you have – at [email protected]