It’s time to cash out.
Though it has been less than two weeks since it triggered, the Volatility Index (VIX) buy signal has run its course. The S&P 500 is 400 points higher. And, anyone who acted on the signal is sitting on solid profits.
Granted, it was tough to take this trade. The stock market was cascading lower. Just about all the television talking heads were bearish. And, it felt like the world was on the precipice of World War III.
But, VIX buy signals have an outstanding track record. All six of the previous signals over the past year had generated profits. So, as the VIX was on the verge of generating a seventh buy signal, we suggested it was a good time to bet on a bounce.
Now though, it looks like that bounce is ending. The VIX is actually on the verge of a sell signal. Here’s the updated chart…
The blue arrows on the chart show all the VIX buy signals over the past year. The red arrows point to the sell signals.
These signals are triggered when the VIX closes outside of its Bollinger Bands and then closes back inside the bands. In any given year, we tend to get about twice as many buy signals as sell signals. But, just because the sell signals are less frequent doesn’t mean they are any less effective.
Here’s how the S&P 500 behaved following the previous two sell signals over the past year…
Both sell signals triggered right before the S&P 500 dropped 100-150 points. Those aren’t big declines. And, the market quickly recovered from each of those signals.
BUT…
Given that the market seems to be following a similar script to how it played out last year, it makes sense to be a bit conservative here. This next sell signal could be larger than usual.
So, if you bought when the VIX was on the verge of generating a buy signal two weeks ago, then congratulations.
Take the gains and move to the sidelines. The VIX is now setting up for a sell signal.
And, VIX signals have an outstanding track record.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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