By Eric Shamilov, analyst, Market Minute
June 16 marked the current low of the market.
At the time, the S&P 500 was down 23% on the year and the Nasdaq 100 down 32%.
The market was painfully oversold.
Yet three days before the low, the Volatility Index (VIX) had already topped out and was dropping substantially with the market.
Typically, that’s not how it goes.
Many were quick to decry the VIX a broken indicator. Yet, here we are again, with the market rebounding 6.5% out of an official bear market.
The trajectory of the VIX has once again proved to be a harbinger of the market’s short-term direction.
The truth is, as long as investors use options to buy protection, the VIX must be a staple of your trading screen…
If the VIX drops it can only mean one thing – investors aren’t scared enough to bid up out-of-the-money options.
And when fear incrementally decreases, the market stabilizes – as it did in this case.
Although the VIX is simplistic and accessible, it still carries a lot of information.
Professional traders can be very arrogant when it comes to easily accessible data points – and very wrong, as they were in this case.
But aside from analyzing its movement, there are other ways to use the VIX.
So, when my colleague, Jeff Clark, was gathering research for yesterday’s VIX essay… I had no choice but to check my bullishness at the door.
Thankfully I did, because yesterday was not a great day for the market.
And that’s especially true when considering other factors.
For instance, here’s a tweet that grabbed my attention since I’ve been writing a lot about behavioral market drivers like mood…
The mood still looks bad, and this recent relief rally hasn’t fixed that.
This trader’s experience echoes what most portfolio managers running the nation’s money are thinking as well. They’re looking for an opportunity to take money off the table on every rally.
And they’ll be looking to do it in the tech sector.
It’s something I called one of the biggest developments for 2022 in my outlook essay on December 10…
Tech may be the biggest disappointment of next year… In the same vein that bitcoin was a hype-filled disappointment from the context of risk relative to reward, tech was too.
Every retail investor I’ve spoken with has been interested in one thing – tech.
You see, investors tend to become myopic right before a trend begins to unravel. That’s what I’m seeing now with many pockets of the tech sector.
But there needs to be a pin that pops the balloon, and it usually comes in the form of central bank policy changes. With monetary policy heading toward something akin to normalization, we’re finally heading into a “golden age of value.”
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The easiest way to illustrate this is by charting the ratio of the Nasdaq 100 Invesco QQQ Trust Series 1 (QQQ) versus the SPDR S&P 500 (SPY). It shows the performance differential of overweighting growth and tech.
It’s important to pay attention to spreads like this because they give information you can’t get by looking at price alone… and help pinpoint exactly what area of the market looks set to outperform.
The chart shows the deep downtrend in QQQ’s relative performance versus the more value-oriented SPY as a ratio. So, when this spread is rising that means QQQ is outperforming.
But recently, it’s begun to oscillate and trade in a type of pattern known as a “bear flag.” In fact, this is a classic bear flag with two big, consecutive down moves followed by a rising consolidation pattern (red dotted lines).
One of the reasons the freefall has paused is due to the recent bond rally, which sent interest rates down from their highs.
But this bond rally has more to do with technical positioning than the market betting on lower rates.
Traders are using the rally to re-enter their short bets on bonds, which is why rates are already off their lows from last week.
Even if the market continues higher from here (which has a good chance of happening), it’s best to continue looking for opportunities to do what the biggest managers are doing…
Continue positioning out of growth stocks on every rally and into value-oriented sectors that don’t get scorched in a rising interest rate environment.
Regards,
Eric Shamilov
Analyst, Market Minute
Reader Mailbag
In today’s mailbag, Market Minute subscribers Uppunda and Walter share their thoughts…
I’ve been following Stansberry Research from the very beginning for over 40 years. I followed Jeff Clark from there, and his Market Minute essays are the ones I’m eagerly waiting to read. Keep up the good work. I’m ever thankful for your insights, analysis, and actionable advice.
– Uppunda B.
I’ve been trading for 65 years, and I never caught up with BITO options. Many thanks for bringing me up to date. Great info!
– Walter P.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].