But, our crystal ball told us it was time to sell.<\/p>\n
The S&P 500 lost 5% over the next two weeks.<\/p>\n
So now, with the S&P 500 once again nearing an all-time high, with the Iran situation now placed on the back burner, and with just about all of the financial television talking heads once again leaning bullish, it’s a good time to take another look at our crystal ball.<\/p>\n
Regular readers know about the predictive power of VIX option prices. We’ve used extreme deviations in option prices before as a sort of “crystal ball” for the immediate direction of the stock market.<\/p>\n
Right now, the prices of VIX option contracts are suggesting a higher VIX over the next few days, and the next few weeks. And, a higher VIX usually goes along with a lower stock market.<\/p>\n
For example, yesterday, as the VIX was trading at 14.60, the VIX September 2 $15 calls were trading for $0.90. Meanwhile, the VIX September 2 $15 puts were trading for $0.10.<\/p>\n
In other words, VIX calls – which were $0.40 out of the money – were trading for nine times the price of VIX puts, which were $0.40 in the money.<\/p>\n
VIX call options are much more expensive than the equivalent put options. This suggests the VIX will be higher next Wednesday than where it was yesterday.<\/p>\n
This is an extreme price difference.<\/p>\n
When we’ve seen this condition before, it has usually resulted with the VIX moving higher <\/em>and the stock market moving lower<\/em> in the short term.<\/p>\n If we go out a bit further in time, the picture is even more bearish. The VIX September 16 $15 calls traded yesterday for $2.05 while the equivalent put option was $0.12.<\/p>\n Traders were willing to pay 17 times the price to bet on a higher VIX by mid-September than they were to bet on a lower one.<\/p>\n There’s no question – the crystal ball is leaning in the bearish direction.<\/p>\n
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