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The CBOE Volatility Index (VIX) doesn’t always tell the whole truth about turbulent markets.
The VIX has been steadily falling to new lows in recent weeks. But at the same time, implied volatility among individual sectors of the stock market — especially tech stocks — is picking up big-time.
This plays perfectly into our E-Wave cycle forecast that calls for a high-probability stock market correction at any time.
These days of low volatility are numbered, and I expect stocks to melt down at some point this summer. Here’s why …
First, there’s a growing disconnect between the rosy forecasts on Wall Street and what’s really going down in the U.S. economy and on Main Street.
One fundamental factor in particular warns of trouble ahead …
The graph above charts the Citigroup Economic Surprise Index. This is simply a measure of whether economic data (GDP, jobs, housing starts, retail sales, etc.) are exceeding or falling short of expectations.
As you can see, the index began rolling over earlier this year. That indicates more negative than positive surprises in the data reports.
This index has now plunged to one of the lowest levels on record.
In fact, the last time it was this low was 2011 … when the Dow dropped nearly 20% during the summer months!
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With the leading sector of the stock market — technology — under selling pressure already, not to mention the dismal economic data, it’s only a matter of time before the Dow and S&P follow suit … to the downside.
Second, even in the face of weakening economic data, the Fed seems dead-set on raising rates even more this year.
And the Fed’s interest-rate outlook appears much more aggressive than markets are prepared for.
Sooner or later, something’s got to give. And it’s likely to be stock prices, as the Fed blindly sticks to its present path of higher rates regardless.
Mark my words, rising interest rates and less-accommodative monetary policy will trigger market turmoil at some point soon.
And most investors are blissfully unprepared for it right now.
Third, the internal health of the stock market itself — just like the U.S. economy — is deteriorating quickly, even as the Dow and S&P 500 notch new highs. And that’s a huge red flag.
The graph below shows the uptrend in the S&P 500 Index (top panel) this year; including a series of new highs.
However, take a look at the lower panel, which displays the percentage of S&P stocks trading above their 200-day moving average.
As you can plainly see, the number of stocks participating in this rally is steadily falling. Currently more than one-quarter of all S&P 500 stocks are already in bearish downtrends, trading below their 200-day moving average.
This tells me the stock market rally may be living on borrowed time. Keep a watchful eye on the technology sector, because it could be the canary in the coalmine here.
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Tech stocks have been leading the stock market higher all year … that is, up until three weeks ago … when the tech-heavy Nasdaq-100 Index cracked for a one-day drop of nearly 3%.
The index has been struggling to get back on its feet ever since. And it remains well-short of new highs. If technology can snap back strongly, then the stock market rally can continue.
But if the leading stocks (Amazon, Netflix, Facebook, Apple, Microsoft, etc.) continue to slide … then look out below.
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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I appreciate that you give a lot more updates than Larry ever did.
Thanks for your thoughtful report. Very helpful!
Larry forecasted that the dow would hit 31,000 and yet you are calling for a downturn. How do you reconcile the two? Also, I notice that the talking heads on CNBC and Bloomberg equate lower 10 yr. yields with a forecast of slower growth or even a looming recession. Isn’t it possible that our 10 rates are low because of high foreign purchasing demand from countries with ultra-low or genitive interest rates and its basically disintermediation at work and NOT a recession forecast?
He can’t. In spite of the pretty graphs they are unable to predict the TIMING of events, which is paramount. They miscalculated Trumps tax cuts to the corporations and deregulation would be sidelined by his corruption…which Burnick said was “unfounded.” As if his opinion would save the markets from complete collapse when Mueller presents findings. NOW they want you to hedge for market downturns. Hedge your bets with puts and such. They are.
but what happen today mike ? dow up 145 some odd points 20 for the s&p etc.
I guess when your always a bear sooner or later you will be right.
looks like the bitcoin bubble has popped, eh?
hi mike, maybe the fed is planning a full blast withdrawal of credit (1929 style). and interest rates skyrocketing to send everybody scurrying for the essentials of life. other currencies might get hurt as well. this will reveal how much people of other countries rely on the dollar.
its a real dilemma. i do not think anyone knows the full extent of the world wide problem developing. news from russia indicates a preparation for full scale war with the west. i think that america should back down and withdraw from middle east countries to defuse the situation. russia is sitting put. maybe usa could do the same, but that is wistful thinking. cheers, ron from oz.
Hi Mike
For anyone watching the Fed and other reserve banks around the world, kicking the can down the road in recent years, this is not surprising. Having claimed some credit for the Trump bump, the Donald is now the perfect one to blame for the created narrative of the coming stock market correction. After all many in the media were saying that Mr. Obama left the economy in pretty good shape. The Fed of course won’t take any blame while they increase interest rates into this scenario. After all many have been saying for years that a return to normalisation was long overdue. As for me I’m in a trench wearing my helmet.
Mike,
Weiss has been calling for a correction since December 2016. However the market seems to blissfully ignore basic math and valuations. Does Larry’s charts account for lack of common sense from investors?