Last week, 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%.
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.
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
