A strong recovery from last month’s correction … Two indicators that John Jagerson and Wade Hansen are eyeing today … where they think the market is headed
Before we dive into today’s Digest, a quick note…
Next Tuesday, April 20th at 7 PM ET, Matt McCall and Louis Navellier will be holding a special event to answer the most important questions on investors’ minds today…
Where are the strongest investments right now?
Which post-COVID sectors may never recover, and need to be avoided at all costs?
What about the various red flags of rising interest rates, inflation, and high valuations?
Next Tuesday, Matt and Louis will be providing a road-map to help you navigate all this complexity.
The last time they did this, their road-map could have helped you beat the market by nearly 11X…in less than two months.
Well, they’re back at it with Tuesday’s Roadmap to Recovery Event. They’ll address all the questions above, as well as explain what they see coming for the rest of 2021.
It’s all next Tuesday, April 20th, at 7 PM ET. All you have to do is click here to reserve your seat. Hope to see you there.
***About five weeks ago, the market felt far shakier than today
The Nasdaq had fallen into official correction territory (down 10%+), and many financial talking-heads were proclaiming the tech-trade was done thanks to soaring interest rates.
Here’s the Nasdaq from last November through early March’s correction. The drop beginning in mid-February was steep and nerve-rattling for sure.
As this correction played out, here in the Digest, we often turned to our technical experts, John Jagerson and Wade Hansen. They helped us navigate the market volatility calmly so that we didn’t make any fear-based, kneejerk decisions.
John and Wade suggested what we were experiencing was temporary weakness – even a buying opportunity.
Here was their takeaway from early March:
We plan to maintain a bullish bias for now.
Valuations are very high, but we think this is more likely to cause volatility than a sharp decline.
Adjustments like this are routine. If there is still some volatility to come, our expectations are that it will play out similarly to the profit-taking last September, which wound up working out very well in our favor.
This time appears to have worked out very well too.
Since that mid-March weakness, the Nasdaq has rallied. As I write Friday around noon, it’s sitting less than half-a-percent below its all-time-high set back in February.
Meanwhile, the Dow and the S&P 500 have continued chugging along over the last six weeks without any major white-knuckle moments. Both are hovering around all-time-highs as I write.
But as always, the question before investors is “what’s next?”
Today, let’s return to John and Wade to see how they’re measuring up the market looking forward.
What are they seeing from traders that might give us an idea of what to expect over the coming weeks and months?
Let’s jump in and find out.
***Two indicators confirming John’s and Wade’s bullishness
For newer Digest readers, John and Wade are the experts behind Strategic Trader. It’s an elite options service in which they combine insightful technical and fundamental analysis with market history, to take advantage of all sorts of market conditions.
As part of their analysis, they frequently analyze a variety of indicators, ratios, and chart patterns to suss out clues about where the market is headed. In their update from Wednesday, they highlighted two key indicators that suggest more gains are coming – the CBOE Volatility Index (VIX) and the CBOE SKEW Index (SKEW).
Let’s begin with the VIX.
Here are John and Wade to introduce the indicator:
The VIX is a market sentiment indicator that looks at the value of out-of-the-money (OTM) put options and OTM call options on the S&P 500 index to determine how much volatility investors anticipate in the market in the near future.
When the VIX is moving lower, it shows traders are becoming less concerned about potential bearish reversals. The less concerned they are, the fewer put options on the S&P 500 they buy.
This pushes the value of those options lower, which pushes the VIX lower.
When the VIX is moving higher, it shows traders are becoming more concerned about potential bearish reversals. The more concerned they are, the more put options on the S&P 500 they buy.
This pushes the value of those options higher, which pushes the VIX higher.
John and Wade provide the chart below that shows the VIX from fall 2019 through today.
It illustrates how the market’s level of concern fluctuates over time, which drives the VIX.
Fig. 1 — Daily Chart of the CBOE Volatility Index (VIX) — Chart Source: TradingView
As you can see above, during the early part of 2020, traders weren’t too concerned about market weakness. This is evidenced by the VIX remaining in a relatively low range between 12 and 20.
But then all hell broke lose in late February when traders realized the impact of the coronavirus on the global economy.
The VIX soared, peaking at 82. Since then, however, it has pulled back (despite brief spikes) and has been consolidating above the level of 20.
But as John and Wade note, the VIX has recently broken below 20 and is drifting back down into its early-2020 range.
As I write Friday morning, the VIX has dropped to 16.50.
Back to John and Wade for how to interpret this decline:
This tells us that Wall Street is no longer worried about the stock market suffering a dramatic pullback anytime soon.
It’s important to remember, however, that not being worried about a pullback is not the same thing as believing the current bullish trend in the S&P 500 is going to continue unabated.
To get some more insight on where Wall Street believes the stock market is going to go in the future, let’s take a look at the SKEW.
***What we can learn from the CBOE SKEW Index
For readers less familiar, the SKEW is another market sentiment indicator. Like the VIX, it relies on out-of-the-money (OTM) options prices. (You don’t need to understand this options terminology to understand the significance of the indicator.)
Back to John and Wade for more on the SKEW:
The SKEW looks at the difference in the value of OTM put options and OTM call options on the S&P 500 index to determine how much more traders are willing to pay for deep OTM put options than they are for less-deep OTM put options and OTM call options.
Since the market crash of 1987, the relationship between the value of OTM puts and OTM calls has been skewed toward puts.
This makes sense as traders are naturally more concerned about a market collapse than a bullish surge. They’re willing to pay up for deep, protective puts than hopeful, pie-in-the-sky calls.
So, how do we interpret the SKEW?
From the Strategic Trader update:
When the SKEW is moving lower, it shows traders are less convinced that a bearish move lower is more likely than a bullish move higher. The less convinced they are, the less likely they are to pay a premium for deep OTM put options on the S&P 500 compared to what they are willing to pay for deep OTM call options.
This decreases the skew, or imbalance, between the value of the OTM put options and the OTM call options and pushes the SKEW closer to 100 – the point at which put and call values are in equilibrium.
It works the same on the other side.
When the SKEW moves higher, it signifies that traders are more convinced that a bearish move lower is more likely than a bullish move higher.
The more conviction they feel, the more likely they are to pay up for protective puts…and the less likely they are to pay for bullish call options.
This increases the skew, or imbalance, between the value of the OTM put options and the OTM call options. It pushes the SKEW further away from 100.
John and Wade provide the chart below, which shows the SKEW rising and falling from fall 2019 through this week.
Fig. 2 — Daily Chart of the CBOE SKEW Index (SKEW) — Chart Source: TradingView
Back to John and Wade for the SKEW’s recent action, and how to interpret it:
The SKEW has been bouncing back and forth between an up-trending support level between 110 and 120 and a down-trending resistance level between 147.50 and 150.
Most recently, after consolidating above support at ~135, the SKEW dipped lower for the first time in 2021.
This tells us that traders are becoming increasingly bullish in their option buying as the S&P 500 soars to new highs (see Fig. 3).
Fig. 3 — Daily Chart of the S&P 500 (SPX) — Chart Source: TradingView
This is great news for anyone with a bullish portfolio.
***Look for more bullishness to come
Putting these two indicators together paints a decidedly bullish picture. And, in fact, that’s how John and Wade are viewing today’s market.
Here’s how they sum things up in their Wednesday update:
Earnings season officially kicked off today (Wednesday) with JPMorgan Chase (JPM) and other big banks releasing strong numbers. This is a good start, and we expect to see this trend continue.
Watch for strong earnings to keep bullish sentiment, and the S&P 500, afloat.
Yes, valuations are high. But the economy is re-opening, retail sales are booming, and broad sentiment is bullish. Until something materially changes, it’s a simple game-plan…
Stay long.
Have a good evening,
Jeff Remsburg
