Here’s what you need to know about last week’s bounce | Exchange places with Tom Bowley

The Volatility Index ($VIX) is one of my key sentiment indicators and has a history of accurately predicting corrections and bear markets. We won’t have either unless the VIX clears a significant hurdle in the 17-20 range first. A bear market calls for a great deal of fear and panic, and the VIX acts as a stock market meteorologist, predicting that a major market storm is approaching. Throughout this secular bull market, periods of underperformance for the S&P 500 have seen VIX readings above 20. Rather than repeating these findings in this article, I would like to refer to a Trading Places article I wrote in November 2023, “What Are the Possibility of a Market Crash? Is the Probability of a Market Crash Shown at 0 by This Indicator?

In my recent Trading Places Live YouTube show and in regular emails to EB.com members, I have consistently discussed the significant increase in risk that occurs when the VIX closes above 20. I don’t take this lightly and you shouldn’t either. But check out what happened over the past few weeks when VIX surged closer to 20.

We saw a straight up move from the October 2023 lows, and the chart above gives off a whiff of bullish momentum slowing down during the second half of the first quarter. Weakness was expected in March, but was postponed to April. The final decline in October was characterized by a significant increase in VIX. In the end, VIX closed above 20. Once the VIX returns below 17, the selling and correction is over and the bull market has resumed. Hence the reason for the November article linked above:

When evaluating a bounce like the one we had last week, I want to see if a “risky” market environment resumes. Here are some ratios I like to follow and how they react during bounces.

All three of these ratios have bounced higher in the S&P 500, but all remain in downward trends that began before the S&P 500 selloff. This means that “risk aversion” is still at work to some extent and further confirmation is needed that a short-term bottom is in play. Watch VIX if it falls again. If the S&P 500 hits new lows and fears dissipate (i.e. VIX stays below 20), I see that as a positive sign.

Over the past two weeks, I’ve been sharing the best upcoming earnings reports from the financial and industrial sectors. Two companies (AXP and GE) had very strong reactions to their quarterly results. Tomorrow morning, we’ll share our top technology picks with subscribers of our free EB Digest newsletter. If you haven’t subscribed yet and would like to see which tech companies are reporting huge quarters in the coming years, click here and enter your name and email address. No credit card required, and you can cancel your subscription at any time.

Have a great week and happy trading!

tom