The VIX and EQPCR are our guiding lights right now
I hope you’re paying attention because I’m about to let you in on a little secret…
I’m watching the VIX very closely right now.
It seems to be creeping toward one of my rules – the VIX always knocks twice.
People get fearful, then they feel like it’s hit bottom and time to buy. But then, all of a sudden, you get the next wash out and the VIX goes up a level – maybe as high as $45 or $50.
So, keep in mind, if we see it crack the $35 mark, we could see more volatility around the corner, and it could hit the $39 or $40 mark in short order.
Look, part of me wants the VIX to hit $39. But the reasonable part of me knows that would mean really bad things are happening in the market.
That’s because the VIX is an indicator of market sentiment, and if I’ve said it once, I’ll say it again: market sentiment is a big deal right now.
It’s what we’re monitoring to figure out when to switch from bearish to bullish. Once we move past Acceptance into Despair, that’s when the light starts to appear at the end of the tunnel.
So, that being said, I’ve got to talk about all of the crazy stuff going on with a direct impact on sentiment.
We’ve got the NASDAQ hitting new lows. We’ve got JP Morgan CEO Jamie Dimon changing his tune and saying he expects a recession within the next 6-9 months.
Of course, my favorite indicator of market sentiment is the CBOE Equity Put/Call Ratio.
This is the grandfather of sentiment indicators. Period. Bar none.
All the investor polls, screw ‘em. This is the one.
Why is it better than investor polls? Well, the investor polls are all bearish, and I mean uber-bearish. They’re going upside down.
This is different. This is people putting money on the table.
It’s easy to say, “I think the market is going to be higher,” or, “I think the market is going to be lower.”
People say a lot of things – those things aren’t always their true feelings. Their true feelings are reflected in what they’re doing with their money. It becomes a lot more difficult when you have to put money behind your words.
If more people are trading puts than calls (an EQPCR reading above 1.0), that’s a reflection of negative market sentiment.
Well, the EQPCR is doing exactly what I said you need to wait out…
We had a reading of 1.02 back in September, and as I told you, this is the beginning of something that could be good.
But look what’s happening now. We’re right back down to 0.60 last night, and the 20-day moving average is kind of trending down.
We need that thing to pop back higher, otherwise a reading of 1.02 means nothing.
If you remember, we talked about how that reading needed to be followed by subsequently higher readings.
In the five days after we found out about the pandemic, it averaged a reading of 1.05. That’s what I want to see, guys.
So, what all of this, combined with the earlier VIX stuff, tells me is that we’re still in for a bit of an Ice Bucket Challenge for the market.
It could come from the PPI reading tomorrow. It could come from the CPI number Thursday.
When that happens, the $35 level on the VIX is going to get taken out. You’re going to see that EQPCR head back up toward 1.0.
That means you need to be on the defensive.
Even though the market’s down 1.5% and the NASDAQ’s breaking new lows, I am telling you the sentiment you see in that EQPCR – even though we’re in the Acceptance phase – is still investors sliding down a slope of hope.
So, I told you last week to start buying some QQQ puts. Over the next couple of days, start to look at the VanEck Semiconductor ETF (SMH), the SPDR S&P Homebuilders ETF (XHB), the Financial Select Sector SPDR Fund (XLF), and, as always, the Consumer Discretionary Select Sector SPDR Fund (XLY).
Those are the five sectors that I’m picking on as we brace for what’s to come.
Join me tomorrow morning for more on a really, really big week.
October 11 2022