The market isn’t ready to crash… yet.

The recent selloff is scary, for sure. And it’s probably a warning sign of things to come. But even at Monday’s lows, the S&P 500 was down less than 10% from its high. That’s not a crash. It’s a mild correction.

For now, for the very short term, it’s probably not going to get much worse.

Yes, there is good reason to be cautious with stocks. After all, the S&P 500 is trading near the top of its historical valuation. Economic data is increasingly showing signs of a slowing economy.

Investors have been taking on a gambling mentality of late – which often happens near a top in the stock market. And we’re heading into the traditionally volatile months of September and October.

Are We In for a Drop?

Now, it’s August. The weather is still hot. Money tends to flow into the market rather than out of it. Technical indicators suggest there’s still time for one more rally before the market suffers any significant decline.

Granted, I argued the same point just over a week ago  – when the S&P 500 was trading near 5400. The index then rallied 175 points before giving it all back over the past few sessions.

Some folks have written in and asked me if that 175-point pop was the rally I was looking for. So, are we now set up for a significant drop?

My answer is not yet. Indeed, it looks to me as though we’re setting up for a more significant rally first – before we get a stronger decline.

Look at this updated chart of the Volatility Index along with its Bollinger Bands…

The 175-point rally in the S&P 500 that we saw early last week came in response to the VIX buy signal. That’s what happens when the VIX closes above its upper Bollinger Band, and then drops back down to close inside the bands.

We’ve had several VIX buy signals so far in 2024. All but one marked at least a short-term low in the market and led to quick rallies.

Following the sharp decline on Monday, the VIX closed again above its upper Bollinger Band. In fact, it is farther outside of its Bollinger Bands than at any other point all year.

So, the next rally has the potential to be a stronger bounce than was generated by any of the previous VIX buy signals.

First though, we just need the VIX to close back inside the bands.

As I wrote following the previous buy signal back on July 24…

VIX buy signals have an outstanding track record. Bears should let this next one play out before attempting to add any short exposure.

Bulls can step in and buy in anticipation of a strong market bounce. But don’t overstay your welcome. Once this bounce runs its course, things could get dicey.

September is coming.

Best regards and good trading,

Jeff Clark
Editor, Market Minute