Tuesday, May 13, 2014
It's almost time to head for the exits.
Last month, we bought stocks in anticipation of a rally going into the end of the month. The S&P 500 has rallied about 4% since then.
A few weeks ago, I told you to keep an eye on the Volatility Index (the "VIX") to know when to sell and take profits. The VIX hasn't triggered the "sell" signal yet. But it's getting close. And we may get the signal this week...
Take a look at this updated chart of the VIX plotted along with its Bollinger Bands...
Bollinger Bands measure the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it indicates an extreme condition – either extremely overbought or extremely oversold. Since the VIX is a contrary indicator, it's best to buy stocks when the VIX is extremely overbought. It's best to sell stocks when the VIX is extremely oversold.
The blue arrows on the chart point to the times when the VIX traded above its upper Bollinger Band and then fell back below it. Those are "buy" signals. We got one in mid-April. That's what prompted us to buy stocks then.
The red arrows point to times when the VIX fell below its lower Bollinger Band and then closed back above it. Those are "sell" signals. There have only been two during the past year. Each one was followed by a modest decline of between 2% and 5% in the S&P 500.
Yesterday, the VIX dropped to one of the lowest levels of the year. That coincided with the S&P 500 rallying to a new all-time high. There's still room for the VIX to fall a bit more before dropping below its lower Bollinger Band. So there's still a bit more upside left for the stock market. But this bounce off the April lows has just about run its course.
Traders need to pay close attention to the VIX right now. Once it closes below its lower Bollinger Band, it'll be time to take profits and get out of the stock market.
Best regards and good trading,
While the stock-market rally may be coming to an end, Jeff says the next gold rally just kicked off. "And we're about to see much higher prices for the metal," he writes. Get all the details right here.
Jeff also thinks it's a great time to invest in silver. "Silver is one of those trades where the upside potential is so large, I'm uncomfortable being out of it for too long," he writes. And one of his timing indicators just signaled a "buy." Learn more here.
Copper is trying to start a new uptrend... prices break out to a two-month high.
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"Bad to less bad" rally drives coal-producer fund KOL to a new four-month high.
U.S. manufacturing boom sends 3M to a new all-time high... shares are up 72% in the past two years, including dividends.