The “easy money” from the recent buy signal is done.
Any further gains from here are going to be hard fought. And, if our crystal ball has anything to say about it, the stock market is more likely to be lower two weeks from now rather than higher.
The Volatility Index (VIX) generated a broad stock market buy signal earlier this month. We figured it was likely to be a winning signal, and the stock market would be higher.
It took only one week for the buy signal to play out…
All the major indexes (DJIA, COMPQ, and SPX) are about 4% higher today than they were last week.
And, while the market was rallying last week, the VIX was falling. It finished the week down 39%.
Of course, the VIX option prices told us that was going to happen.
Last Monday, VIX put options were trading about 50% more expensive than VIX calls. Our “crystal ball” was saying the VIX would be lower in the coming week. And, a lower VIX usually goes along with a higher stock market.
Now though, the crystal ball is saying something different. VIX call options closed Friday at nearly four times the price of the equivalent put options.
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For example, the VIX closed at 18.69 on Friday. The VIX December 15 $19 puts – which expire in two days – closed at $0.35. Meanwhile, the VIX December 15 $19 calls closed at $1.30.
In other words, traders are willing to pay nearly four times more to buy out of the money VIX calls than in the money VIX puts.
If we go out one week farther, the VIX December 22 $19 puts closed Friday at $1.00. The equivalent calls closed at $2.00. That’s not as big of a difference as the options expiring this week.
So, we might interpret that to mean that the next two days may be more volatile than the following week.
Still, though, the VIX calls are more than double the price of the VIX puts. When we’ve seen this condition before it often leads to a higher VIX in the days ahead. And a higher VIX usually goes along with a falling stock market.
Traders who bought into last week’s buy signal might consider trimming some profits today.
And, folks who might be looking to put more money to work in the current environment might have a better chance to do so in the days ahead.
Best regards and good trading,
Will you be trimming profits soon, or are you going to put in more money based on what the “crystal ball” is predicting?
Let us know your thoughts – and any questions you have – at [email protected].