As of Thursday, January 26, 2017 at the close of trading EquitySurge™ has continued a strong sell signal for USA equities.
Stocks consolidated today after the big move up over the past two days. The S&P500 Index closed down about 2 points to the 2297 level.
We talked briefly yesterday about the situation with the Volatility Index and its front (current) month futures contract price being extremely low compared to its longest futures expiration price which is in October, 2017. This difference means that traders of the S&P500 Index are expecting little volatility right now, or in other words traders are becoming extremely complacent in the current market environment.
Another way to look at volatility is to examine the VelocityShares Daily Inverse VIX, symbol XIV, which is an exchange traded note (similar to an ETF) designed to move up in price as volatility declines. Right now the XIV is at an all-time-high price of around 61.50, not surprising given that the S&P500 Index as at its all-time-high price as well, and volatility is at a near record low level also.
One thing to always remember about volatility however is that it is linked to the pricing of index options on the S&P500 Index, and when something happens to cause fear to increase in the markets, mathematics in those options takes over and the volatility index spikes dramatically higher. This massive spike higher in volatility is what drives the price of the S&P500 Index down as part of the interplay of the index options linked to volatility.
In other words when something bad happens the effect on the markets is an almost automatic spike higher in volatility, which can become exponential or vertical in nature very quickly, especially when it’s starting from such a low (complacent) level, the result of which will be a dramatic and immediate drop in the price of stocks. Said another way, you won’t have time to get out of your equity longs.
At this point in time, in addition to the warnings about continuing to be long this market from liquidity, we also now have a “perfect storm” setup with volatility being so low, its current price so much lower than its longest futures contract price, and also the XIV having gone vertical in price since the election.
Our goal at EquitySurge is to help investors get in near market bottoms (buy low) and get out near market tops (sell high). We are in the midst of a sell high environment.
If you would like to review the EquitySurge™ trading signals generated in 2016 and so far 2017 please see the Trading Signal Performance Chart page.