The stock market hit its upside target yesterday.When the S&P 500 broke out of its month-long trading range last week, we figured it could rally up to 3020 or so. And, that’s exactly where the index peaked yesterday.
Now, with that target out of the way, the obvious question is… Where do we go from here?
According to the stock market’s crystal ball, we’re likely going lower.
Let me explain…
Longtime readers know I often refer to Volatility Index (VIX) option prices as the “crystal ball” of the stock market. They do have unique predictive abilities – which I explained the last time we looked at VIX options in early July.
Back then, VIX call options for July and August expirations were much more expensive than the equivalent put options. So, the crystal ball was telling us the VIX would likely be higher in the days and weeks ahead.
And, since the broad stock market usually falls as the VIX moves higher, we figured the S&P 500 would be lower.
The crystal ball was correct. The VIX was trading at about 14 on July 8. It was above 23 one month later.
The S&P 500 was at 2980 in early July. It lost 140 points by early August.
And right now, VIX option prices are flashing a similar signal…
The current VIX option prices (as of Friday) tell us that traders expect the index to move higher over the next week. We know this because the price of VIX call options that expire on September 18 is significantly more than the price for similar VIX put options. At-the-money call options are basically five times the price of put options.
And, if we go out one month further, the VIX call options that expire on October 16 are six times the price of the put options.
For example, just compare the VIX October 16, $14.50 calls to the VIX October 16, $14.50 puts. The calls were offered yesterday at $3.10, while the puts were offered at $0.50. (I use my trading quote system to track these prices, but you can also find them here.) This was when the VIX was trading at 14.15.
In other words, even though the VIX puts are $0.35 in the money (meaning they have intrinsic value), and the VIX calls are $0.35 out of the money, the call options are trading for more than six times the price of the put options.
VIX option traders clearly expect the index to move higher over the next several days, and even higher still over the next month. And a rising VIX (rising volatility) usually accompanies a falling stock market.
So, if you want to know where the stock market goes from here, then pay attention to VIX option prices. Right now, the crystal ball says the market’s next big move is most likely lower.
Best regards and good trading,
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