The Volatility Index (VIX) is flashing a warning sign.

The VIX closed Monday right on its lower Bollinger Band (BB). That’s a sign of extreme complacency in the stock market. And it’s something that has happened five previous times over the past 12 months. Each time was followed by an immediate decline in the broad stock market.

So, it’s probably a bad idea to ignore this signal.

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Longtime readers know the VIX triggers a stock market sell signal when it closes below its lower Bollinger Band and then comes back to close inside the bands. Those signals are powerful. But, they’re also rare. And holding out for the VIX to actually close below its lower Bollinger Band before getting defensive would have meant suffering through the biggest declines of the past year.

But, if we relax the parameters a bit and get defensive as the VIX merely approaches its lower BB – like closes within 0.10 of the lower BB – then we can avoid a lot of pain.

Take a look at this chart of the VIX…

The red circles on the chart show the six times – including the current setup – where the VIX closed within 0.10 of its lower Bollinger Band.

Here’s how the S&P 500 behaved following each of those occurrences…

The S&P 500 made a short-term top within days after each VIX signal. The ensuing declines were sometimes modest – like the 30-point decline in the S&P last May, or the 35-point pullback last August. The declines last November and December, though, were much more painful.

Of course, we don’t know if the current signal will result in a modest decline or a more painful one. Heck, we can’t even be certain we’ll get a decline at all. But, given the track record, and given the pain most investors endured in December, now is probably a good time to get a little defensive.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In today’s mailbag, a new Delta Report subscriber shares their interest in the service…

I’ve been following Jeff for a while and think he’s a smart guy. As a former fundamental hedge fund manager, I learned the hard way how important technicals are, although I did have positive performance every year as a professional manager.

In any event, I am interested in the service and I’m going to give it a try, especially since I’m trying to devote my attention to work helping others, rather than investing. But I will be maintaining a portfolio. And since I’ve been trading predominantly in options lately, due to the risks I see in the markets, Jeff service makes a lot of sense for me. Many thanks.

– Mitch

And a couple of subscribers respond to Monday’s
Market Minute

Thank you for taking the time to share your thoughts on the market and over all your trading ideas. I love your newsletter.

– Alex

I am newbie to trading and really appreciate the education you provide. The charts in this article are wonderful.

– Carlos

How are you planning to “get defensive,” like Jeff says? Or are you taking a different trading approach entirely?

Let us know, along with any other trading questions, suggestions, or stories at [email protected].

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