The stock market has been ripping higher this week. And the curious thing is… the stock market’s fear gauge has been ripping higher as well.
The Volatility Index (VIX) – often used as a measure of investor fear or complacency – usually falls as the stock market moves higher. But the VIX is more than 15% higher today than where it started the week. This action has a lot of folks scratching their heads and asking, “Are investors really getting more fearful as the stock market moves higher?”
The simple answer is no.
The more complicated answer is that investors are actually getting more speculative during this week’s rally. Let me explain…
The VIX really measures the option premium traders are willing to pay on S&P 500 Index options – both puts and calls. It makes sense that the VIX would move higher when the stock market falls. That’s when traders are willing to pay up to buy insurance – in the form of put options – to hedge their portfolios, or to speculate on the downside. As traders rush to buy puts, the premium increases and the VIX moves higher.
The VIX can also move higher when the stock market rallies. But it’s not because traders are rushing to buy put options. Instead, they’re rushing to buy calls.
You see, as more and more traders get the urge to speculate on a market rally, they rush to buy S&P 500 call options. The increased demand forces the option premium higher – which, in turn, pushes the VIX higher as well.
A rising VIX often signals an increase in fear in the market. But, it can also signal an increase in speculative activity. That’s why the VIX has been rising this week.
How do I know?
Because the CBOE Total Put/Call Ratio ($CPC) dropped to one of its lowest levels of the year this week. Take a look…
This is a ratio chart that compares the total number of put options traded to the total number of call options. If the ratio is above 1, then traders are buying more put options than call options. A ratio below 1 means call options are more popular.
On Wednesday, $CPC closed at just 0.68. That means traders were rushing to buy far more call options than puts as the stock market pressed higher. And it’s that speculative activity – the rush to buy call options in a rising market – that is causing the VIX to move higher.
So, the VIX is not rising because of fear. It’s rising because of an increase in speculation.
Perhaps that’s something to fear after all.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Editor’s note: We had quite the heavy mailbag come in for this morning. And as always, we’re eager to share your thoughtful insights.
But before we get to that, a question…
Jeff, have you ever considered giving an odd trade for free (say, in the Market Minute)?
– Peter
Jeff: Hi Peter, thanks for writing in. I’m sure you can understand that I reserve my specific trade ideas for Delta Report subscribers.
At the same time, though, I humbly think the Market Minute is one of the best FREE resources available to traders. I may not share specific trade ideas, but the broad stock market action we discuss here can provide a good grounding for readers to make their own trades.
For example, in yesterday’s issue, I showed that both my bullish call on the retail sector and my bearish call on semiconductor stocks were accurate. You could have made solid returns on either of those ideas.
Also, my essays about the warning signs taking shape in the high-yield bond market, as well as strategies involving VIX options, should help you make winning moves.
Like I said, I keep my specific trading guidance for my Delta Report subscribers. (If you’d like to learn a bit more about a subscription, click here.)
But as you see, you can certainly use the Market Minute to your benefit.
And now… your reflections on this week in the Market Minute…
Your piece on KTEL was a real gas! I might still have one in my pile of vinyl! Are we going to short RIOT? Sounds like a no-brainer! Keep that good stuff coming, Jeff!
– Ric B.
I’ve been subscribing for a couple of months now and am learning lots about trading. Today I saw your acronym, “FOMO” (Fear Of Missing Out) for the first time. It reminds me of the old saying:
“Status: Spending money you don’t have… to buy things you don’t need… to impress people you don’t like.”
Most people want to “keep up with the Joneses,” so they will “cash out” of their old, traditional, reliable, conservative beliefs and investments, so they can “cash in” on whatever is new and trendy. But sooner or later they experience that the bubble bursts and they’re out of cash… or out of life.
The antidote to FOMO or Status is sticking with the tried and true instead of the new and trendy.
– Robert H.
Sounds like you may have had your clients in the First Eagle Global Fund back in 1999.
– Paul S.
The current FOMO is bitcoin in particular and cryptocurrencies in general. I am not in them because I am intimidated by the steps it takes to be able to participate, but the outsized growth in “value” certainly is tempting.
After reading today’s Market Minute… I think I will stay on the sidelines and be content following your guidance.
– Charles S.
We also heard the latest experiences from Delta Report subscribers, new and old…
Good morning Jeff. I totally agree with your comments today about FOMO.
I have not been doing very well in my overall trades this year, but I have to tell you that those I have followed from you have all given positive results, for example 48.6% on Macy’s, 13.9% on ABT, 62.48% on SPY, and 50.56% on GME.
The one thing I have learned from you, you said very well today; remain focused on your long-term goals and don’t FEAR to MISS OUT on RISKY TRADES!
I am VERY PLEASED I subscribed to your service. Keep up the great work, advice, and recommendations!
– Raymond D.
I didn’t do well on your Goldcorp call trade and was stopped out and took a 50% loss. I know you said this was a speculative trade and I took that risk. I look forward to your next recommendation. I am a recent lifetime subscriber.
– Pru B.
Personally, I don’t care how many trades you recommend each day, week, or year. If the risk/reward ratio isn’t right, patience will be rewarded.
Options can be a tricky business and it’s easy to lose money quickly when investors are reckless with their trades. Thanks.
– Craig E.
Goldcorp UPGRADED today and ABX downgraded by CITI bank. Stocks always react to these analysts. I think it is a bunch of BS myself and these stocks will settle at the point the market sees them.
– Jeff W.
Well I learned a lesson yesterday when I saw your Delta Report on BBBY. I learned that I need to trust and wait until you let us know what to do.
I had watched the trade move lower on Monday and thought since I had not heard anything, I would go ahead and sell the remaining position before it dropped down to the point you had originally indicated we should sell in the initial report. If I had waited until you let us know, I could have sold my remaining positions at $1.65 instead of the $1.10 I did.
Now I know to be a little more patient! Thank you.
– Ken A.
I am new to your service this year. Thank you for taking the time to teach and explain not only your trades, but your thinking about the markets. Thank you for having the conviction to wait until you believe the time and conditions are as right as they can be for a trade. And thank you for giving me a second opportunity to become a lifetime subscriber.
You see, the first time you offered, I was just getting my feet on the Jeff Clark ground. Since then, I had profited from your trades such that it was a no-brainer to me to jump on the lifetime offer, as just the GME and BBBY trades covered my cost, not to mention to previous profitable trades. I look forward your pushes every weekday morning. Thank you for all you and your staff do that help me and my family’s financial security.
P.S. I know FOMO only too well. At least, I have learned to make very small changes/investments/bets when I do give in!
– Robert M.
Thanks to everyone for the valuable words. Whether it’s a question, comment, or suggestion, feel free to write in anytime.