{"id":20474,"date":"2023-01-10T07:30:46","date_gmt":"2023-01-10T12:30:46","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=20474"},"modified":"2023-01-10T07:30:46","modified_gmt":"2023-01-10T12:30:46","slug":"our-crystal-ball-is-showing-contrarian-sentiment","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/our-crystal-ball-is-showing-contrarian-sentiment\/","title":{"rendered":"Our Crystal Ball Is Showing Contrarian Sentiment"},"content":{"rendered":"

The crystal ball is warning us not to trust the current stock market rally.<\/p>\n

Friday’s big bounce following the non-farm payrolls report pushed the S&P 500 to its highest level since mid-December. It broke above several resistance levels – like the 9-day and 20-day exponential moving averages (EMAs).<\/p>\n

And it changed the sentiment of many of the financial television talking heads – who were wildly bearish on Thursday but flipped to bullish following Friday’s move.<\/p>\n

Most of the talking heads are now looking for higher stock prices over the next several weeks.<\/p>\n

But the crystal ball suggests otherwise…<\/p>\n

The Predictive Power of VIX Option Prices<\/h2>\n

We haven’t looked into the crystal ball since August 15<\/a>. Back then, the market was putting on a massive rally. But the crystal ball was warning us to be careful. It predicted stocks would be lower in the weeks ahead.<\/p>\n

Two weeks later, the S&P 500 was down 9%. Six weeks later, the market had lost 16%.<\/p>\n

Regular readers know we’ve used extreme deviations in option prices before to predict the immediate direction of the stock market. The trading signals from VIX options are so reliable, that I refer to this indicator as a “crystal ball.”<\/p>\n

And right now, Volatility Index (VIX) call options are much more expensive than the equivalent put options<\/a>. Whenever this condition exists, the broad stock market is vulnerable to a sharp and sudden decline.<\/p>\n

You see, VIX options are not like most stock option contracts, which can be exercised<\/a> at any time.<\/p>\n

VIX options are European-style contracts – meaning they can only be exercised on option expiration day. This eliminates any possible “arbitrage<\/a>” effect (the act of buying an option, exercising it immediately, and then selling the underlying security for a profit).<\/p>\n

So, VIX options will often trade at a discount to intrinsic value.<\/p>\n\n\n\n
\n

Free Trading Resources<\/strong><\/p>\n

Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

For example, on Friday, the VIX closed near 21. At that level, the VIX January 11 $23 puts were intrinsically worth $2.00. But, they were offered at only $1.60. That’s a $0.40 discount to their intrinsic value.<\/p>\n

If this put existed on a regular, American-style stock option, you could buy it, exercise it, and liquidate the position all day long – picking up $40 for every contract you traded.<\/p>\n

But the European-style feature prevents that from happening because you can only exercise the contract on the January 11 option expiration day.<\/p>\n

A Bearish Short-Term Outlook<\/h2>\n

Because of its unique pricing structure, VIX options provide terrific clues about where most traders expect the VIX to be on option expiration day.<\/p>\n

As I mentioned above, the VIX traded at 21 on Friday. The VIX January 18 $21 call options were offered at $1.65. Meanwhile, the VIX January 18 $21 puts were offered for $0.50.<\/p>\n

In other words, traders were willing to pay more than triple the price for a VIX call option than for a VIX put option.<\/p>\n

This sentiment is just as evident if you go out a little further and compare the VIX February 15 $21 calls to the VIX February 15 $21 puts. The calls closed Friday were offered at $2.80, while the puts were only $0.90. (I use my trading quote system to track these prices, but you can find them at FreeRealTime.com<\/a>.)<\/p>\n

When VIX calls are far more expensive than the equivalent put options, it shows VIX option traders expect the index to move sharply higher over the next few weeks.<\/p>\n

And a rising VIX (rising volatility) usually accompanies a falling stock market.<\/p>\n

So, if you’re making short-term bullish bets, be careful. The VIX “crystal ball” has a very good track record… I’m betting it’ll prove correct this time, as well.<\/p>\n

Best regards and good trading,<\/p>\n\n\n
\"signature\"<\/td>\n<\/tr>\n<\/table>\n

Jeff Clark<\/p>\n

<\/p>\n

Reader Mailbag<\/strong><\/h2>\n

In today’s mailbag, a reader expresses their appreciation for Jeff and his services…<\/p>\n

\n

The best comment I can make about Jeff Clark is his genuineness! I read him as honestly straightforward and really caring about “us” as investors. He doesn’t take his company for granted, nor us. I appreciate being part of a company that has my best interest at heart and a man at the helm who cares! Keep it up Jeff!<\/p>\n

– Anonymous<\/strong><\/p>\n<\/blockquote>\n

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com<\/a>.<\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

If you\u2019re making short-term bullish bets, be careful\u2026<\/p>\n","protected":false},"author":49,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ep_exclude_from_search":false,"service":"","footnotes":""},"categories":[1],"tags":[],"publication":[10],"person":[7],"newsletter-type":[],"ticker":[],"class_list":["post-20474","post","type-post","status-publish","format-standard","hentry","category-market-minute","publication-market-minute","person-jeff-clark"],"acf":[],"_links":{"self":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/20474","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/users\/49"}],"replies":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/comments?post=20474"}],"version-history":[{"count":0,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/20474\/revisions"}],"wp:attachment":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/media?parent=20474"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/categories?post=20474"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/tags?post=20474"},{"taxonomy":"publication","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/publication?post=20474"},{"taxonomy":"person","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/person?post=20474"},{"taxonomy":"newsletter-type","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/newsletter-type?post=20474"},{"taxonomy":"ticker","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/ticker?post=20474"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}