Well… here we go again…
The Volatility Index (VIX) is flashing another warning sign. It closed Friday right on its lower Bollinger Band. That’s a sign of extreme complacency in the stock market. And, that’s a BIG caution signal.
Here’s an updated chart…
The last time the VIX closed right on its lower Bollinger Band was back on February 4. At the time, I pointed out that the broad stock market usually makes a short-term top within days of that happening.
The ensuing decline could be modest – like what happened under similar conditions last May and last August. Or the drop could be more severe, like we saw last November and December.
As it turned out, the S&P 500 pulled back just 35 points – barely more than 1% – in the days following the last VIX caution sign. Then, it was off to the races again. The index closed Friday more than 3% above where it was one month ago.
You could have just napped through whatever “danger” the VIX signal was warning about last month. And you’d be waking up to even greater riches today.
So, why should we pay any attention to the current VIX warning sign?
Well… let’s just say it seems like too many people are willing to nap through it. Let me explain…
The American Association of Individual Investors (AAII) publishes a weekly survey in which it asks respondents if their stock market outlook is bullish, bearish, or neutral over the next six months. It’s an excellent gauge of investor sentiment, and it’s a useful contrary indicator – meaning when the bullish numbers are high, then it’s time to be cautious. And when the bearish numbers are high, then it’s time to start buying stocks.
On January 31, the date of the AAII survey, and just prior to the VIX closing on its lower Bollinger Band on February 4, bullish respondents to the survey were 32%. Bearish respondents were also at 32%. So, investor sentiment was evenly matched.
As of last week’s survey, though, the bulls have jumped to 42% – the highest number of bulls since October 4, 2018. Meanwhile, the bears have fallen to just 20% – the lowest number in several years.
So… like I said… it sure seems like a lot of people are napping right now.
I suspect the VIX warning we got on Friday is going to be a bit more significant than the one last month.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, a new Delta Report subscriber chimes in on the service…
I’m new to your service and have read all of your material, at least twice. You’ve done a very fine job creating your training videos. Perhaps the best I’ve seen! It’s obvious you know your trade, and I suspect you have an intuitive sense, based on your charts, where stocks are going. I’m happy to be a member of your service.
– Paul
How do you trade when the VIX throws up a big caution sign? Are getting more aggressive, or one of the many who are “napping”?
As always, you can send any other trading stories, questions, or suggestions to feedback@jeffclarktrader.com. We read every piece of feedback that comes through.