Rising VIX And Weak Markets Might Actually Be A Buy Signal

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April 20, 2017 10:18am NYSE:SPY

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From Brad Hoppmann: The big run higher in stocks since the election has stalled, and professional traders are taking that seriously.


In fact, the big run in the major indices since Nov. 8 has created a situation where U.S. stocks have become overvalued. At least, that’s the latest take by more than four out of five professional traders.

According to the latest monthly Bank of America Merrill Lynch fund manager report survey, 83% of respondents say domestic stocks are too expensive.

That’s a record number for this metric since the survey began in 1999.

But just how expensive are stocks right now? Well, the S&P 500 trades at about 17.5X expected earnings over the next 12 months. That’s the highest level since 2002.

Now, considering the smart money is just that — smart — it’s no surprise that many of these market pros are shifting allocations. They are moving their money to areas of the market that offer more-attractive valuations.

According to CNBC:

… portfolio managers are moving overseas, with allocations to emerging markets hitting a five-year high and Europe seeing the most in 15 months. U.S. levels are at their lowest since January 2008.

This rotation is interesting, especially considering the heightened geopolitical tumult over the past several weeks … not only in hot spots like Syria, North Korea and Afghanistan, but also in Europe.

The European Union is officially undergoing “Brexit.” And no matter how smooth the transition is, it’s likely to create some political and economic dislocation.

Still, many pros are bullish about Europe. Per the CNBC article:Then there’s the French presidential election. This is creating even more uncertainty over a potential “Brexit-like” win by far-right candidate Marine Le Pen.

“In spite of the French presidential election starting in less than a week, investors’ perception of Europe is increasingly bullish,” said Ronan Carr, BofAML European equity strategist. “Although we agree on the allure of Europe’s earnings recovery, complacency looks extremely high.”

While the pros might be bullish or even just complacent about Europe, the fear factor here at home is rising.

The CBOE Volatility Index, or VIX, has just reached its highest level of the year. That shouldn’t be much of a surprise given the geopolitical angst combined with the lack of progress on the pro-growth Trump agenda.

The VIX has risen 20.5% since April 6, when the U.S. bombed a Syrian airbase. Meanwhile, the S&P 500 has fallen 0.8%.

Yet the latest move higher in the VIX has at least a few market pros looking at the latest development as a contrarian indicator.

In a (separate) article at CNBC, trader Stacey Gilbert of Susquehanna noted that the VIX went inverted last week. Meaning, the front month’s reading of expected volatility was higher than the reading of the next two months’ expected volatility.

That means traders are anticipating higher volatility in the nearer term than they are in the longer term.

“That typically doesn’t happen; it’s very rare for it to happen. But when it does, and at the levels that we saw on Thursday, over the next 30 days the market typically is higher, let’s say on average around 2.3 percent higher,” Gilbert commented Monday on CNBC’s “Trading Nation.”

Here’s another “contrarian indicator” that the market is so replete with. And, it might mean that, if you are a trader, now is the time to start nibbling on long positions.

That’s not just my idea. It’s also the thinking of trader Ari Wald, Oppenheimer’s head of technical analysis.

Wald points out that historically, when the VIX spikes while the market is in an uptrend, above-average returns tend to be seen in stocks over the coming three to six months.

Per CNBC:

Since 1990, when this signal between the VIX and the market is triggered as it was last Thursday, the average gain over the next six months has been 8 percent, versus 4 percent for any six-month period.

So, if you’re a trader, take note.

The SPDR S&P 500 ETF Trust (NYSE:SPY) was trading at $234.03 per share on Thursday morning, up $0.59 (+0.25%). Year-to-date, SPY has gained 4.70%, versus a % rise in the benchmark S&P 500 index during the same period.

SPY currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 108 ETFs in the Large Cap Blend ETFs category.


This article is brought to you courtesy of Uncommon Wisdom Daily.


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