Stocks have been hitting new highs recently, and the Melt Up is in full force.
That’s a positive sign for the next year or so. Don’t expect a one-way ride higher, though.
In fact, one worrying sign could mean we’re about to see a bump in the road for stocks.
You see, traders are all betting the steady rally will continue…
It’s been a one-way move higher for the past couple of months.
And traders are betting that smooth ride is here to stay.
In fact, bets on low volatility are now at record levels.
Futures traders have lost all fear of a pullback.
And that could be a short-term warning sign for the broader U.S. market.
Let me explain…
The CBOE Volatility Index (“VIX”) is a simple way to gauge fear in the market. Volatility spikes usually occur when investors panic. And panic often comes with widespread price swings in U.S. stocks.
We haven’t seen those kinds of big swings lately, though. U.S. stocks have climbed higher and higher. And the VIX has stayed at low levels for months.
Today, futures traders are betting the easy money will continue. Fear of any major spike in volatility is gone.
We can see this through the Commitment of Traders (“COT”) report on the VIX. It’s a weekly report that tells us what futures traders are doing with their money. And it’s a great contrarian tool.
You see, when these traders are all betting in one direction, the opposite is likely to occur. And right now, futures traders are “all in” on lower volatility. Take a look…
Record bets on low volatility have flashed short-term warning signs in the past…
We saw a similar occurrence back in 2017. The S&P 500 was coming off of a 30%-plus rally that started in 2016. By late 2017, volatility was at extreme lows… And traders were all betting that the steady rally was the new normal.
Stocks peaked a few months later, and we saw our first correction in roughly two years.
This isn’t a long-term signal, though. We’re still in the thick of a Melt Up. And we expect to see much higher stock prices before the ultimate peak in U.S. stocks.
Melt Ups aren’t just a one-way move higher. Heck, the late ’90s Melt Up saw five corrections before the ultimate peak of the dot-com boom in 2000.
Based on what’s happening right now, we could be in for a correction in the coming months. Just remember – that’s normal, even during a Melt Up… And it’ll likely just be a bump in the road before the market hits new highs again.
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Source: Daily Wealth