The Volatility Index generated a sell signal last week.
Unlike buy signals, which happen on average four or five times per year, VIX sell signals are rare. We only get about one each year. And, the length and severity of the sell signals are much different than the buy signals.
VIX buy signals tend to play out with the broad stock market making an immediate, quick upside move – just like we saw in November. The VIX generated a buy signal when the S&P 500 was trading below 6600. Two weeks later, the index was at 6850 and heading towards a new high. Buy signals often kick into gear within just a few days.
VIX sell signals, on the other hand, take longer to get started. And, they tend to lead to intermediate-term declines. For example, longtime readers may remember the sell signal we wrote about back in March 2022.
The stock market continued higher for about one week after the signal. But, once the selling started, it continued for several weeks.
The S&P 500 was trading above 4600 in late March 2022. Three months later, it was near 3700.
As I mentioned previously, the VIX generated a sell signal last week.
Here’s an updated chart of the VIX along with its Bollinger Bands (BB – solid blue lines)…
The VIX generates trading signals when it closes outside of its Bollinger Bands and then closes back inside the bands.
The blue arrows on the chart point to all of the VIX buy signals over the past year.
The two red arrows point to the sell signals. The first signal, in July, preceded a nearly 300-point decline in the S&P 500.
The second sell signal occurred last week – during the seasonally bullish holiday period. The market has mostly ignored the signal so far. The S&P 500 is trading at about the same level it was at when the signal was triggered.
But, we know VIX sell signals often take some time to kick into gear. And, if this one plays out like the sell signal from July, the stock market could be in for a difficult January.
Given the strong track record of this indicator, investors should be careful not to chase stocks higher into any strength over the next few days.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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