The stock market has been tumbling this week as the Nasdaq and popular fad tech stocks have gone into a correction, with many of the most widely owned stocks on the top 100 Robinhood popular list in collapse. It was clear that the tech sector was at high risk of entering a correction as I wrote last week. On Tuesday the market dumped hard and many people came out to call a bottom buy, but Wednesday morning in my post I said that there was no bottom at hand yet and to ignore such bottom callers and to be careful.
This made a few people angry, but I will not stop calling things the way I see them. I can’t be perfect and I can’t predict the future, but I can be do the best I can, when most people just cater and give people what they want to hear for hits and fear of backlash. In fact you can see some of the anger in Youtube comments made in response to my Tuesday video, in which I explained how Robinhood itself has herded many into losing money by the way it designed.
But today is a new day and we are getting closer to a bottom now.
Stock market drops like this end in panic selling.
We are now close to that moment.
The best way to gauge panic in the market is through the VIX indicator, because it measures what people are actually doing in the markets and not what they are just saying.
What the VIX does is measure the premium that people pay in the options market for volatility. Some sell stocks and funds in panic at bottoms, but others buy put options as hedges. When those people panic they end up going nuts buying the puts, thereby pushing the volalitility premiums up to the sky.
The VIX goes up and down with those premiums and historically panic comes into the market when the VIX goes over 30 – and except for times like 2008 and the crash last April – market corrections tend to end when the VIX has a day in which it goes above 30 and then goes back down to finish the day below that level.
It’s close to that level now and if the market falls again today it likely to go above it.
You can see from this chart how VIX moves above 30 have led to key bottoms in the market since the March/April 2020 crash. Actually this is the case going back through the decades long history of the VIX. I’ve been using it as a timing signal since 1999.
I’m personally looking for a VIX move above 30 and then back below to do some buying.
The Nasdaq is still likely to test its March low and 200-day moving average.
One thing to note is that the Nasdaq has been lagging the S&P 500 since February. It led the way up last year, but now it and the popular big cap tech fad stocks are now badly lagging.
We are in the process of a great rotation in which the new trend is no longer dreaming of techno wonders, memes, and “white papers,” but looking at companies with earnings now instead of later, dividends, and that can thrive during times of inflation. Speculative dream like things like space rockets are in collapse.
Even CNBC’s head market man is recognizing what is happening.
The Nasdaq 100 has given up just about all of its lead over the S&P 500 on a one-year look. pic.twitter.com/2I4P7SRdJM— Michael Santoli (@michaelsantoli) May 12, 2021
The fad plays are ending.
Last night Elon Musk even announced that Tesla is no longer going to accept Bitcoin as payment. That is putting pressure on the trading open as so many small investors have cryptos in their accounts and cryptos are down across the board to put additional pressure on them. The idea that Bitcoin is a safe haven that can go up when the stock market goes down has been proven once again to be a giant myth. The problem is so many are on margin that now, as I pointed out yesterday, that there will be some wiped out from crypto dump. Instead of helping people, crypto coins today are ruining them.
Margin selling can cause short-term pressure on everything as people are forced to sell anything they own. It’s a recipe for mass panic, that does bring in a bottom, but it’s not fun, and didn’t have to happen if more would have spoken out against the design of Robinhood and crypto crap coins.
Yesterday, before the stock market open, the news came out that the CPI inflation rate exploded. As Reuters reported, “economists polled by Reuters had forecast the CPI would climb 0.2%. In the 12 months through April, the CPI shot up 4.2%. That was the largest gain since September 2008 and followed a 2.6% increase in March. The jump mostly reflected the dropping of last spring’s weak readings from the calculation.”
The Federal Reserve tried to massage worries over this CPI print before the open with a speech by Federal Reserve Vice Chair Richard H. Clarida in which he said that the Federal Reserve would not raise rates to stop inflation as it was predicting it would go away by the end of the year. The Federal Reserve can’t raise rates without collapsing everything so they have no choice now except to predict that the inflation that is happening is not going to last.
The bad thing is that the fad tech stocks began to lag the market weeks ago. When stocks lag as the averages go up that’s a bad sign for them and a warning that on the next drop they will fall hard. And now so many people invested in the fad Robinhood stocks and ETF’s like ARKK are not doing so well. They experienced something like this (which was a warning sign) going into last week.
The reality is a great rotation money shift is taking place. Inflation sectors are what are now winning in the markets, as commodities have exploded this year along with energy stocks and material stocks to beat the performance of the Nasdaq so far year to date. Risings yields are helping banks stocks. JP Morgan is now outperforming TSLA. If you want to beat the markets the way to do it is to be in the things beating the markets. That’s why I like my top stock pick for this month – it’s part of this trend. The things that will lead on the next rally are those that have fallen LESS than the market averages have on this decline.
UPDATE 7:35 AM – If the market goes green off the open this morning and the VIX fails to go above 30 I would look at the action as a final short-term bounce before a new final drop likely to bring a bottom next week.