Caution: The Market’s ‘Crystal Ball’ Has Gone From Bullish to Bearish

Once again, the stock market’s crystal ball proved to be deadly accurate.

About a month ago, I wrote that the option premiums on the Volatility Index (“VIX”) were slanted highly in favor of a lower VIX.

And because a lower VIX usually means a higher stock market, I argued the market’s crystal ball – VIX option prices – was predicting a rally in stocks…

Here’s what I wrote…

The price difference isn’t enough to suggest that we’re about to see a rip-roaring stock market rally. But it is enough of a difference to suggest the S&P 500 could put on a decent bounce over the next month or two – perhaps back up to the 20-month exponential moving average near 1,970.

We got that rally… and then some. The S&P 500 closed at 2,000 last Friday. The index gained 170 points – or 9.3% – in less than one month.

[ad#Google Adsense 336×280-IA]In order to appreciate just how valuable this crystal ball is, you have to go back and look at the market’s conditions from one month ago.

Stocks were falling hard. The S&P 500 was testing the support of the January low. Investors were scared.

Just about all of the financial television talking heads were bearish. It looked like the stock market was ready to crash.

But the VIX option prices painted a different picture. VIX put options were far more expensive than the calls.

The crystal ball was telling us the market’s decline was just about over, and we’d soon get a rally.

If you paid attention to the VIX option prices back then, you’ve enjoyed an impressive month of gains.

Of course, now the question is… What is the crystal ball now telling us about the market’s future? Let’s take a look…

[Wednesday], the VIX was trading for about $18.50. The VIX March $18 calls – which expire on March 16 and have $0.50 of intrinsic value – were priced at $2. The VIX March $19 puts – which have the same expiration and the same $0.50 of intrinsic value – were priced at just $0.60.

In other words, the VIX call options were more than three times the price of similar put options.

If we go out to April expiration, we see a similar story…

The VIX April $18 calls traded yesterday for $3.50. The VIX April $19 puts – which have the same intrinsic value as the $18 calls – were priced at $1.30.

So now, after a one-month rally that pushed the market up 9%, stretched most technical indicators to extremely overbought conditions, flipped investor sentiment from bearish to bullish, and got the TV talking heads squawking about a possible run to new all-time highs… it’s time to be careful.

Right now, the crystal ball looks bearish.

Best regards and good trading,

Jeff Clark

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Source: Growth Stock Wire