For the past several months I have said several times that I didn’t see much worth doing in the stock market (the time to have done a lot of buying had come and gone and it no longer was worth doing much more with the market at elevated levels).
That mean two things.
First, that being patient was the best thing to do in the markets for the time being.
Secondly, that by saying this on Youtube my views would collapse, as their algorithms know that what people want to hear is buy recommendations and market cheerleading at all times. Saying be patient is simply too boring for people and makes people jump to another video – or another TV channel if it is someone on TV in the markets saying that. Youtube punishes those that don’t give the masses what they want.
More important, though, is what bothered me starting in June was the declining internals in the market, which I highlighted again in my post Monday morning. Such internal weakness leads to stock market drops. However, as I wrote in that post, I think a real correction in the market isn’t coming for a few more months.
I still believe that.
Yesterday, we saw panic selling in the market and enough of it to cause the VIX to jump up over 30% and get near the 30 mark. It ended the day off of its highs, as you can see from this chart. Spikes in the VIX like this often mark the end of stock market declines. If I was daytrading I would have bought the close.
Here is how the VIX works.
Some investors and traders panic in a market decline by selling their positions, while others instead buy puts as hedges. That activity drives the VIX up to elevated levels, as what measures is the volatility premium options traders are paying for options. The premiums skyrocket when buyers panic to hedge.
That’s why the VIX spikes tend to coincide with panic bottoms.
That’s what we saw Monday.
What is next?
I expect we’ll see the market come out of this week rallying and will likely rally into November.
However, if that rally comes with continued weakness in the internal indicators it will likely lead to the next real, twenty percent or greater, correction/decline in the financial markets.
My guess is that it would play out something like what we saw in the last quarter of 2018, when markets fell in fears of a hawkish Fed. Gold declined BEFORE the market correction began and then went up as it fell. A similar play looks like it is lining up.
Right now I’m just watching to see how things unfold over the next few weeks, but this is my guess now of how things are going to play out.
Gold looks sold out. It went up while the market went down on Monday.
-Mike
