So far, the whole “sell on Rosh Hashanah” adage seems to be playing out.
The S&P 500 has fallen for five straight days. That’s the longest losing streak of 2021 so far. The index is down 1.8% since we rang in the Jewish New Year.
There are three days left in the seasonally weak period between Rosh Hashanah and Yom Kippur. And, it won’t surprise anyone to see a bit more weakness in the stock market between now and then.
But now, the real question is… Will traders follow through on the second half of that well known Wall Street adage and buy on Yom Kippur?
In order to answer that, let’s turn to our crystal ball…
Volatility Index (VIX) option prices have been remarkably accurate this year in predicting the immediate, short-term direction for the stock market.
We’ve referred to this “crystal ball” power of VIX options many times. In fact, it was just two weeks ago when we noted that VIX call options were five times the price of VIX put options. That sort of discrepancy usually leads to a higher VIX… And a higher VIX usually goes along with a lower stock market.
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The VIX is up more than 30% since then. And, the S&P 500 has been falling for five straight days.
Now though, the stock market’s crystal ball is a little cloudy. VIX call and put options are trading for about the same prices. There’s no edge to either side. And that means there’s an equal chance the market can go either way from here.
For example, the VIX closed near 21 on Friday. The VIX September 15 $21 calls – which expire Wednesday morning – were priced at $1.50. The VIX September 15 $21 puts were trading for $1.80.
If we go out another week to the September 22 expiration series of options, then the $21 calls and puts are both trading for about $2.20.
So, like I said, there’s no edge to either side here. And without an edge, it’s hard to trade on the market’s direction.
I will suggest this, however…
If you were short the stock market last week because of the whole “sell on Rosh Hashanah” adage, and the crystal ball leaning bearish, then congratulations. You should have a profit. Now, after five straight down days, and without any clear direction from the crystal ball, it’s probably a good idea to cash out that trade.
As we head into this coming Wednesday and Thursday, pay close attention to the prices on VIX call and put options that expire next week and next month. If the VIX put options start trading for much more than the equivalent VIX call options, then there’s a good chance that traders will be buying on Yom Kippur.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Did you take the “sell on Rosh Hashanah” approach to your trading last week? Or, do you normally avoid market adages?
Let us know your thoughts – and any questions you have – at [email protected].