The Crystal Ball Has Turned Bearish

That should just about do it for the Volatility Index (VIX) broad stock market buy signal. [Jeff Clark's Market Minute]( The Crystal Ball Has Turned Bearish By Jeff Clark, editor, Market Minute That should just about do it for the Volatility Index (VIX) broad stock market buy signal. The VIX generated a buy signal [two weeks ago]( when it first closed above its upper Bollinger Band, and then closed back inside the bands. The S&P 500 was trading at about 4990 at the time – roughly 130 points below its 50-day moving average (MA) line. We speculated that the 50-day MA would be a good upside target for an oversold bounce. And, that target was hit last Friday – with the S&P 500 trading as high as 5135. Traders who bought stocks two weeks ago on the basis of the VIX buy signal should lock in profits right now. Not only is the VIX now approaching its lower Bollinger Band, but also our crystal ball is screaming “be careful!” Recommended Link [Did the Federal Reserve just save the U.S. economy?]( [image]( For the past several weeks, stocks have been caught in rough waters. In fact, Wall Street has been holding its breath, eagerly awaiting the Fed’s next update. And now, investors can finally breathe again. We believe the Federal Reserve may have just saved the U.S. economy from a recession – and given investors the green light for a huge summer rally. That means now is the time to buy stocks. [Find out which stocks are our favorites to buy right now.]( -- The Predictive Power of the VIX 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. And right now, Volatility Index (VIX) call options are much more expensive than the equivalent put options. Whenever this condition exists, the broad stock market is vulnerable to a sharp and sudden decline. You see, VIX options are not like most stock option contracts, which can be exercised at any time. VIX options are European-style contracts – meaning they can only be exercised on option expiration day. This eliminates any possible “arbitrage” effect (the act of buying an option, exercising it immediately, and then selling the underlying security for a profit). So VIX options will often trade at a discount to intrinsic value. For example, on Friday, the VIX closed at 13.49. At that level, the VIX May 15 $14 puts were intrinsically worth $0.51. But they were offered at only $0.40. That’s an $0.11 discount to their intrinsic value. If it existed on a regular, American-style stock option, you could buy the put, exercise it, and liquidate the position all day long – picking up $11 for every contract you traded. The European-style feature prevents that from happening – because you can only exercise the contract on the May 15 option expiration day. Because of this unique pricing structure, VIX options provide strong clues about where most traders expect the VIX to be on option expiration day. Now, consider this… Free Trading Resources Have you checked out Jeff's free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just [click here]( to check it out. It’s Bearish On Friday, with the VIX trading below $13.50, the VIX May 15, $13.50 puts closed at about $0.10. Meanwhile, the VIX May 15, $13.50 calls closed at about $1.20. (I use my trading quote system to track these prices, but you can find them at [FreeRealTime.com]( VIX calls are twelve times the price of the equivalent VIX put options. So, VIX option traders clearly expect the index to move sharply higher between now and May 15. And a rising VIX (rising volatility) usually accompanies a falling stock market. So if you’re making short-term bullish bets, be careful. Just as the VIX buy signals have a very good track record, so too does the VIX crystal ball. And right now, the crystal ball has turned bearish. Best regards and good trading, [Signature] Jeff Clark Editor, Market Minute [Jeff Clark's Market Minute]( Jeff Clark Trader 55 NE 5th Avenue, Delray Beach, FL 33483 [www.jeffclarktrader.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. Jeff Clark Trader welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. 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