It’s time to take another look into the stock market’s crystal ball…
One month ago, we noted that Volatility Index (VIX) call options were significantly more expensive than the equivalent put options. This condition often leads to a sharp rally in the VIX, which usually goes along with a sharp fall in the stock market.
Lopsided conditions in VIX options have been so accurate in projecting future stock market action, that I often refer to it as the market’s “crystal ball.” And once again, the crystal ball’s forecast has proven correct.
The S&P 500 was trading near 3500 one month ago. And the VIX was near 26.
On Wednesday, the S&P 500 closed at 3271. The VIX closed above 40.
VIX option prices are now, however, quite a bit different than where they were a month ago. In fact, the crystal ball now says the stock market is most likely going to be higher in the weeks ahead.
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Let me explain…
On Wednesday, when the VIX closed at 40.28, the VIX November 4 $40 call options – which expire next Wednesday – closed at $3.30. The VIX November 4 $40 put options closed at $5.60.
In other words, traders were willing to pay 70% more for a VIX put option than the equivalent VIX call option. That tells us that traders making bets on the VIX expect the index to move lower over the next few days.
And, a falling VIX often goes along with a rising stock market.
If we go out a few weeks, the price difference is even greater…
The VIX November 18 $40 calls closed Wednesday at $4.80. The equivalent put options closed at $9.
The puts that expire in a little less than three weeks are nearly twice the price of the calls.
So, the crystal ball sees the stock market trading higher in a few weeks than where it is today. And, given the accuracy of this indicator, traders should probably take advantage of the recent weakness in the stock market… and buy this dip.
Best regards and good trading,
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In today’s mailbag, a few subscribers share their thoughts on Monday’s Market Minute about commodities inflation…
Jeff, if left to their own devices, the American farmers could feed the world, or at least half of it. My father and his brothers lived through the Great Depression of the 1930s. Thankfully, they were farmers, and they ate well. However, when FDR sent out his teams to slaughter the farm animals and burn the crops, they lost a lot of their revenue-producing assets, and the labor they had spent acquiring them.
The excuse used by the government was “overproduction.” It was actually nothing more than an “experiment in control.” The result was long food lines in the cities. But the farmers simply went back to business as usual.
This time around, the population is too well informed with our instantaneous communications, so those that produce food commodities could only be restricted to the point where the demand outstripped the supply. And now, prices have risen dramatically. Will they go back down? Of course,
they will – just as soon as this idiotic experiment in control is abandoned and the production of commodities are once again “permitted.”
One other thing that restricts the experiment in control of production of commodities is that most of the farms in America are corporate-owned and ran. Restriction of them would have an effect on the markets and Wall Street. The fat cats must be fed.
Food prices, and all commodities, will go up. Gold, silver, and everything you buy are going to cost more with the printing of “funny money.”
I’m old enough to remember our last bout of galloping inflation. The statistics I’ve read say real inflation is 9% at the moment. It’ll be double that within six months, and maybe more depending on the election results.
Jeff, I just read your thoughts on commodity prices and riots in Market Minute. You are right on. I’m not rioting anytime soon, since
moving this fat body is way too tiring. Thanks for your perspective.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at [email protected].
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