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Last week in Money and Markets, I warned you that the “days of low volatility are numbered, and I expect stocks to melt down” this summer.
As if on cue, the CBOE Market Volatility Index (VIX) spiked over 50% higher last week, from a low below 10 on Monday to a high above 15 on Thursday, and there’s likely much more to come.
Since the global financial crisis in 2008, any time the VIX has slumped to 12 or below, then spiked 50% higher, it almost always ends up peaking above 20, sometimes far above.
* In 2010 and 2011, the VIX spiked from below 12 to reach highs above 40.
* In 2014 and again last year, the VIX peaked in the mid-30s.
* And in late 2015, the VIX didn’t stop running until it climbed above 50!
Of course, in all of these cases the sharp rise in volatility was closely associated with steep stock market selloffs ranging from -7% in 2014 to -19.4% in 2011.
The average decline overall works out to be 13.7%. Plus, there were several smaller VIX spikes in recent years, peaking in the 20s, that coincided with market corrections of about 6%-to-10%.
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And we’re certainly due for another correction of some magnitude, since the last one was over 18 months ago. Our E-Wave cycle model has been calling for a stock market correction that could persist into August or September, so forewarned is forearmed.
And the usual suspects are to blame for the market’s spreading weakness: The FAANG stocks (Facebook, Apple, Amazon, Netflix and Google, which is now Alphabet), today’s favorite cult holdings, have fallen hard in recent weeks, and they can’t seem to get back up.
AAPL is down about 8% from its recent peak while NFLX has tumbled 10%. Meanwhile, the Nasdaq 100 Index is down only 4% from its high, while the Dow is down less than 1%.
Continue to watch these tech darlings – and the Nasdaq – like a hawk, because that’s what led stocks higher this year, and now these stocks are leading to the downside too.
Of course, the important question on the minds of investors is: How far is down? So let’s take a look at the downside potential …
You can clearly see how the tech-heavy Nasdaq is now tracing out a series of lower highs and lower lows. That’s a downtrend, folks. Key support is at the May low just above 5,500 on the Nasdaq. If that level fails to hold, the Nasdaq could easily revisit the March-April trading range lows near 5,300, which would mark a 10% pullback off the recent record high.
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If you’re a long-term investor, consider grabbing gains from some of your winners and raising cash until this correction plays out. If you’re more of a speculator, consider a trade that gives you the potential to profit directly from the decline. For instance, consider the ProShares Short QQQ (PSQ), an inverse ETF that tracks the Nasdaq.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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Of course, the flattening out of the Russell months ago and now the Nasdaq are indicating a coming sell off. Did it ever occur to readers here that the Wack Job currently residing in the White House is giving the markets a case of the “Willies”? History has long ago demostrated that the Markets generally to not do as well when led by Conservative Presidents and Conservative Majority Congresses. Since 1929 the difference has been huge. Both Fortune and Forbes have produced articles demonstrating this problem…. And BOTH 1929-1932 and 2007-2009 occurred with these geniuses at the helm!…. :)
Nice stats Eagle 495, guess a 14% gain on the Dow doesn’t make the cut in ur opinion.
Check6,
1. The Dow lost 60% under Cheney/bush, then gained 160% during Obama. $10,000 invested since 1929 in only Republican Adminstrations would have grown to roughly $11,000. Considering inflation, you’d be under water. The same amount invested in only Democratic Administrations would have grown to over $140,000… Get it now?
2. It is common practice for the Russel, QQQ and SOXX to fail before the Dow and S&P before a sell off. That has happened during the past several months. Get it now?
I just tried to warn readers here about their “6” with the above facts… Get it now?
160% thats easy to do from practically ZERO and the Government supplied support including reducing the cost of currency. So as far as your analogy of Dem verse REP, ITS A FLAWED COMPARISON. The factors that contain or enlarge any market to create volume, value or growth Of course results higher rate if supported by a tax and spend Democratic Government. Any market when propped by a national currency(the fed) will flourish(China) but at what price oh yeah that little Bubble hanging over every AMERICAN Head For Years to come, to the tune of 19.4 Trillion and Counting. So by your own comparison YOUR THINKING IS FLAWED. Find a even playing field then make a comment,
aaahhhhhhhh time to straighten out the wack job known as Eagle495 first off lets tell the truth now little eagle how come you never mention the the longest and severest depression in the 1900s yea you know little baby eagle the one that occurred in 1937 and lasted till well after the end of world war 2 and who was president during that time it was FDR franklin d. roosevelt, who was elected in 1933 and was president until his death in 1945 and who was FDR he was a progressive liberal democrat YES A DEMOCRAT
495,
Your problem is that you care more about your wallet than the destruction of America that has occurred for the previous eight years. Yea,, so what if the market loses 40% of its value. The value was or is the result of artificial cheap credit not increased living standards for the rank and file workers in America.
I consider it a blessing that I do not have any money invested nor do I plan to. I cannot tell you how many book offers, financial survival plans and newsletter subscriptions In have received in the past three years. These have come from men who are probably the best in the business. If they had an economist hall of fame, they would probably all be in it. They get richer by selling books etc. Many claim to have made the same predictions but I do not have one proof that any of them did. At age 72, it’s a bit late for all of this and making me feel like a termite in a yoyo. I appreciate be informed and warned, but have no clue as who I can believe or not believe.
My favorite investment formula is “A=S”
when A=”Analist” and S=”Salesman”
This formula is valid throughout the investment arena.
Mr. Kramer, You are wise to avoid markets at present unless you are a sharp trader. In my opinion Weiss Research is honest and reliable, but I smell trouble ahead and don’t think it smart to accept advice lightly right now. I say listen with a ” jaundiced ear”. We may have a bumpy ride down a slippery slope. It doesn’t hurt to study,though; and I and many others think you can learn to participate in both up and down markets. Be careful; us retail players are like ducks on a pond. Good luck. R D Campbell
Hi Mike, I have been followed your prediction for last 2 years. Very pleased. You gave us advice to invest at the correct time management, not too far from market activity. Nearly 100% you wrote happened. Thank you . I continue to read your analysis and suggestions. I believe you and your team within Edelson Institute will definitely pay off Larry’s mentor and friendship. Please keep up you guys awesome work.