Jeff’s Note:On Wednesday night, I went live from Las Vegas to show you how it’s not so different to Wall Street… the odds are stacked against you.
But I made what some might consider a blasphemous announcement… you can put the odds in your favor without touching options. And due to how rare it is, I may never recommend this strategy again.
A 12-day window is quickly approaching to open the biggest bear market opportunity in 14 years. If you missed out on Wednesday, just click right here to watch the replay.
Continue reading below for my most recent market update. What I see might surprise you…
It seems like everyone is gearing up for a stock market crash…
Financial television talking heads are almost universally bearish. The activity in put options far outpaces the action in call options.
The American Association of Individual Investors (AAII) reports that only 20% of its members have a bullish view of the stock market over the next six months, while 56% hold a bearish view.
And Google reports that searches for “stock market crash” have reached their highest level ever.
But our crystal ball shows something different…
We last peered into the crystal ball on August 15.
Back then, the stock market was rallying – up 16% in six weeks. TV talking heads were bullish. Folks weren’t talking about “revisiting the June lows” anymore.
Instead, many investors were seriously considering the bear market was over. But our crystal ball was bearish… it was telling us to be careful.
And look where we are now. The S&P 500 closed Wednesday at its lowest level of the year. It’s down 14% since mid-August.
That action has caused investor sentiment to shift from bullish in mid-August to extremely bearish today.
So, now is a good time to take another look into the crystal ball.
Regular readers know we often look to Volatility Index (VIX) option prices for clues to the short-term direction of the stock market.
Whenever the price of VIX calls is much higher than the equivalent puts, the market is anticipating a higher VIX in the days ahead. And a higher VIX usually goes along with a lower stock market.
But whenever VIX puts are trading for a much higher premium than the equivalent calls, the market is looking for a lower VIX. And a lower VIX often occurs with a higher stock market.
The trading signals from VIX options are so consistent and so reliable, that I refer to this indicator as a “crystal ball.”
Today, the crystal ball is leaning bullish.
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On Wednesday, the VIX traded at 34. The VIX October 19 $34 call options – which expire next Wednesday – were offered at $1.60. Meanwhile, the VIX October 19 $34 puts – were offered for $3.40.
In other words, traders were willing to pay more than 100% more for a VIX put option than for the equivalent VIX call option. This tells us that traders who are making bets on the VIX expect the index to move lower over the next few days.
This sentiment is just as evident if you go out to next month and compare the VIX November 16 $34 calls to the VIX November 16 $34 puts. The calls traded on Wednesday were offered at $3.20, while the puts were offered at $5.30. (I use my trading quote system to track these prices, but you can find them at FreeRealTime.com.)
VIX puts are far more expensive than the equivalent VIX call options.
So, VIX option traders clearly expect the index to move lower over the next week, and over the next month. And a falling VIX (rising volatility) usually accompanies a rising stock market.
So if you’re making bearish bets right now, be careful. We have a bullish signal from one of our most reliable short-term indicators.
That doesn’t mean the market can’t press even lower from here. Heck, anything can happen…
But it does suggest that a market crash is unlikely. The risk/reward potential in the stock market for the short term now favors the bull.
Best regards and good trading,
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Jeff Clark
Reader Mailbag
Given the VIX’s latest signal, will you be buying more stocks in the coming days?
Let us know your thoughts – and any questions you have – at [email protected].