The VIX sell signal we got on Monday hasn’t done much of anything yet.
Oh sure, the stock market sold off pretty hard on Tuesday. The S&P 500 dipped down towards 2700 or so – knocking about 30 points off the index. But by mid-day yesterday, the market had recovered all of Tuesday’s losses.
“Is that it?” a reader wrote to me, “Is that all we’ll get out of this sell signal?”
I don’t think so.
While it’s possible the recent VIX sell signal ran its course after a one-day, 30-point drop in the S&P 500, it’s not likely. Sell signals usually aren’t so mild.
For example, the sell signal that triggered in April took one week to play out and it shaved 100 points off the S&P 500. Before that, the previous VIX sell signal was all the way back in August of 2016. That led to a 55-point pullback in the index in about three weeks. And the VIX sell signal in June of 2016 took one month to play out. It led to a 130-point drop in the S&P 500.
So, my point here is it seems unlikely the 30-point drop that hit the market on Tuesday is all we’re going to get from the current VIX sell signal.
Take a look at this daily chart of the S&P 500…
At a minimum, it seems to me the index ought to at least pull back to its 50-day moving average line at about 2680. A more severe decline could have the index testing the 2620 level we hit earlier this month.
In either case, it looks to me like we haven’t yet seen the worst of the sell signal. The market has more work to do on the downside.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today, new subscribers of the Delta Report give their impressions…
Jeff, I’m a new member as of May 1. Three trades made $1000+, which does not include the other half of another trade still open at +$500. Paying off my membership fast. Love this service.
– Kevin
Hi Jeff, thanks for everything you do for us. I really enjoy the service and am extremely happy to be a subscriber. I was, fortunately, able to close a recent position this morning on the open for a very nice gain
Also, I just installed the Jeff Clark Trader app on my phone which I had completely forgotten was available. Now I’ll be able to keep up to date with Jeff’s trade alerts regardless of whether or not I am at my desk. Thank you!
– Ralph
And another who’s skeptical of the summer rally Jeff’s been predicting…
It’s unclear to me the reason Jeff keeps expecting a rally into summer for the stock market.
I know Jeff is a believer of seasonal trends, even though “sell in May” has not worked in the past few years due to global central bank manipulation. Quantitative tightening is now actually shrinking money supply and its pace will only accelerate. On top of that, the Treasury is dumping a massive amount of bonds to fund the huge deficit. The money supply problem will only get tighter, which is already reflected in rising interest rates. If we all believe liquidity is ultimately the source that drives all financial markets, then things will only worsen.
– Stephen
Meanwhile, readers sent in stories inspired by yesterday’s article, “How to Make a Bad Trade Worse”…
Hi Jeff. A very interesting read. I’ve done exactly this before. It was a highly recommended stock at the time. But before my last put option trades matured, it declared bankruptcy. I lost 14% of my portfolio and I feel for the guy who lost 98%.
I hope to never make this mistake again. Have a great day.
– Darrell
Hi Jeff. You make a good point about only averaging down when you are building a position you got into too early. I bought a uranium and rare earths mining stock some years ago that I thought looked very promising. What I didn’t realize at the time was how long it would take to build the mine.
Every quarter I follow up on it to see how the build is progressing. It has been five years of slow but steady progress, so I’ve held on even though the stock price has dropped over 90% since I first bought it. Even now after averaging down, my investment is still down 70%.
As you have pointed out repeatedly, it is important to do due diligence and understand all the issues and timing involved in getting them resolved, particularly for this type of investment.
– Lou
Thank you, as always, for your thoughtful insights. Keep them coming right here.