Insights on the VIX and Market Trends

I've got some pretty wild news to share with you about the VIX. This week, the VIX shot up past 65, a level we've only seen twice in the last two decades. Can you believe it? Let that sink in for a sec. This is a big deal, and it's telling us that investors are seriously on edge about where the market's headed in the near future.

Historical Context: Lessons from the Past

Now, as a market technician, I always like to take a step back and see how things compare to the past. The last couple of times the VIX hit these crazy high levels were during the COVID crash in 2020 and the financial crisis back in 2008-2009. In both cases, the S&P 500 took a serious beating before eventually hitting rock bottom and bouncing back.

Sure, the VIX has cooled off a bit since then, settling below 40 and hanging out in the low 30s as of now. But here's the thing: when the VIX is above 20, that's a red flag telling us that fear and uncertainty are running high. And when it's above 30? That's when we know we're in the middle of a full-on correction, just like those nasty drawdowns I mentioned earlier.

Other Key Indicators to Watch

But wait, there's more! The VIX isn't the only indicator that's waving red flags at us. I've got my eye on a couple of other key indicators, like high-yield option-adjusted spreads and how defensive sectors are performing.


High Yield Spreads

When high-yield spreads start widening, it's a sign that bond investors are getting cold feet and becoming more risk-averse. And guess what? When you plot the VIX and high-yield spreads together, it's like they're dancing the same dance - when spreads widen and the VIX spikes, the S&P 500 usually takes a tumble.

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Defensive Sectors

On top of that, defensive sectors like utilities, consumer staples, and real estate have been killing it lately. This tells me that the big money managers are bracing for impact and shifting their portfolios to safer bets.


What This Means for the Market

So, what does all this mean? Well, when you put all these pieces together - the spiking VIX, widening credit spreads, and defensive sectors outperforming - it paints a pretty clear picture of a market that's hunkering down for some rough times ahead. These are the classic signs of a potential market top, which I talked about in one of my recent videos.

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Navigating Options Market Changes

Now, I know the options market has been through some changes lately, with things like zero-days-to-expiration options and crazy liquidity shaking things up. That's why we can't just rely on one indicator like the VIX - we've got to look at the big picture and stay on our toes.

Based on what I'm seeing and how things have played out in the past, I wouldn't be surprised if we see the market take a few more punches, possibly hitting a major low in September or October. It's like déjà vu because we've seen this movie play out so many times in the last 5-10 years.

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Listen, if you're feeling a bit lost in all this market craziness, I've got your back. Come check out my Market Misbehavior Premium Membership, where I'll give you the inside scoop on how to spot market tops and bottoms, and how to position your portfolio to come out on top.

Until next time, keep your head up and your eyes on the charts!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.