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!
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.
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
