The Volatility Index (VIX) triggered a new “buy” signal when it closed back inside its Bollinger Bands on Monday. The odds now favor higher stock prices over the next several days.
Here is the chart of the VIX, plotted along with its Bollinger Bands (blue lines) …
Long-time readers know that Bollinger Bands indicate the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it signals an “extreme” condition. In the case of the VIX, these extreme conditions trigger buy and sell signals for the broad stock market.
Sell signals occur whenever the VIX closes below its lower Bollinger Band and then closes back inside the bands. Buy signals occur when the VIX closes above its upper Bollinger Band and then closes back inside the bands.
Monday’s action marked the sixth VIX buy signal of 2024 so far. All of the previous signals produced immediate, short-term rallies. The last buy signal, in early August, led to a dramatic 400-point gain in the S&P 500 in just two weeks.
Of course, this doesn’t guarantee we’ll see another rally in stocks as a result of the recent VIX buy signal. It is September after all.
But, the stock market has a habit of doing the opposite of what everyone expects it to do. Last week’s decline caused a lot of folks to shift into the “bear” camp. Many of the financial television talking heads are now looking for a stock market correction this month.
What if we rally instead?
That would be unexpected. September is widely known to be the worst-performing month for the stock market. The average return for the market during this month is a loss of about 2%.
Notably, though, the last time the Fed started a rate cutting cycle was in September 2007. Back then, the S&P started the month with a swift decline. It then recovered and finished September with a 4% gain.
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Similar action this time around would have the S&P 500 trading at a new high three weeks from now.
Keep in mind, though, that rally in September 2007 gave investors an excellent chance to lock in gains and raise cash ahead of the turmoil that followed the next year.
If stocks do rally this month, I suspect that will prove to offer a similar opportunity.
Best regards and good trading,
Jeff Clark
Editor, Market Minute