There’s just something in the air.
Spring has sprung, baseball has started, the flowers are coming out… and the market is getting ready to drop 10% or more.
Sounds about right.
Over history, the one thing that drives investors crazy is the seemingly random timing behind a market crash or correction. It always seems to happen when things feel perfect.
That has everything to do with why they happen.
It can all be summed up with a few of the wise words from Warren Buffett…
“Be Fearful When Others Are Greedy”
It may not feel like everyone is greedy, but they are. Let’s look at a few examples.
The CBOE Volatility Index (A.K.A. “The VIX” or “Fear Index”) – I heard Mike Santoli talking about the VIX after the close on CNBC yesterday. Two things struck me about this.
First, he was commenting on the continued string of low reading for the VIX over the last few weeks and how that activity correlates with market tops. He’s right. VIX readings below 15-20 tell us that the market sees little risk in the market.
Yesterday, the VIX popped its head up above the 15 mark during Tuesday’s trading. We’re likely to see the Fear Index close above 15 Wednesday, which is where things get interesting.
We’ve only seen four closes above 15 for the VIX since December 1. Before that, the VIX spent 49 out of 66 days above 15 from August 1 through November 1. The market rolled over from a rally and dropped 10% into the October lows during that period.
The VIX is giving you a warning right now.
How about the CNN Fear and Greed Index?
Yup, it’s flashing signs that we’re amid a market rollover.
Just a week ago, this sentiment index was reading “Extreme Greed.” Now, we’ve dropped to “Greed,” and it’s likely to decline to “Neutral” over the next week.
That’s good, right?
Wrong.
This is part of a cycle.
Think of it as a ball rolling down a hill. Once it starts rolling, it won’t stop until we reach the other extreme, which in this case is “Extreme Fear.” Which is good news.
The last time we saw “Extreme Fear” readings from this indicator was October 26, 2023.
That times up perfectly with the market bottom.
If you bought the exchange-traded fund tracking the tech-heavy Nasdaq, the QQQs, on that date, you would have a return of 28% today.
If you bought anywhere near that, lock in those profits and get ready to buy the shares back at 10% lower prices soon.
That’s just two signs that investors entered the second quarter feeling a little too bullish and greedy.
As is often the case, the market resets that sentiment and gives us an opportunity to buy at lower prices. That’s an opportunity to pad your long-term portfolio returns or buy a bunch of stocks that you have been waiting for lower prices to buy.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.