Caution: It Looks Like the Year-End Rally is Over

That’s all, folks.

The anticipated year-end rally started out with such promise on December 15. But it peaked after just two days. And while the bulls made a valiant attempt to prop up stock prices last week, it looks like they’ve run out of energy.

One of the most reliable technical indicators is now signaling the next move for the stock market is lower.

[ad#Google Adsense 336×280-IA]Let me explain…

Regular readers are familiar with Volatility Index (“VIX”) put and call options… I’ve written about their predictive power before.

VIX options are European-style contracts – meaning they can only be exercised on option-expiration day. And they are a terrific short-term indicator for the stock market.

You see, most folks use the VIX as the stock market’s fear gauge. It’s a contrary indicator.

When the VIX is high, investors are fearful and a market bottom is likely near – so we want to buy. When the VIX is low, investors are complacent and we’re probably close to a short-term top in stock prices – so we want to sell.

To see the trend of the VIX, we look at VIX options. They tell us where most traders expect the VIX to be in the future.

For example, back in June, when the S&P 500 was trading near an all-time high, the VIX call options were significantly more expensive than the VIX put options. In other words, options traders were betting that the VIX would move higher. And since a higher VIX is usually associated with a lower stock market, this was a good reason to be cautious on stock prices. The S&P 500 lost 75 points over the next two weeks.

We had the same situation in August. VIX call options were much more expensive than the put options. The S&P 500 fell more than 200 points in just one week.

Last Thursday, the VIX closed at 15.75. The VIX December 30 $16 put options – which expire on Wednesday – closed at just $0.40. Meanwhile, the VIX December 30 $15 call options closed at $1.10.

So options traders are willing to pay almost five times more to bet on the VIX moving higher by Wednesday.

Going out to January… the VIX January 20 $16 calls – which expire on January 20 – closed Thursday at $2.80. The VIX January 20 $16 puts closed at $0.65.

Traders are willing to pay more than four times more to bet that the VIX will move higher over the next month.

And a higher VIX usually means a lower stock market.

On Monday morning, the S&P 500 was up about 2% for the back half of December. That’s a respectable gain for less than two weeks. But it’s skimpy compared with previous year-end rallies.

Unfortunately for the bulls, with the VIX options prices favoring a higher VIX for the next month, it looks like the year-end rally is over.

The market’s next move is lower.

Best regards and good trading,

Jeff Clark


Source: Growth Stock Wire