EB Daily Market Report - Monday, November 15, 2021

Abbreviated Report Today

I'm abbreviating the DMR today, so that I can quickly get a report to you, detailing what I believe is a significant short-term warning in the market. This one signal in particular does not always pan out, but I ALWAYS listen to it. And I protect capital accordingly.

First, it's options expiration week. Because our major indices have risen so significantly, we're likely to see downward pressure relating to options expiration later this week. We've seen it plenty of times before, so why would this week be any different?

The more significant signal, however, is the rising Volatility Index ($VIX) that's accompanying the rising U.S. equity market. It makes me very nervous. Please keep in mind this type of signal is designed more for short-term traders. I remain VERY BULLISH once we move past options expiration and the VIX signal corrects itself. A rising VIX tells us that the market is growing more cautious. This almost always coincides with a falling market. When it occurs with a rising market, it alerts me to the fact that the stock market may not handle ANY bad news very well. I view this as a SIGNIFICANT short-term risk, not a guarantee of market selling.

Let me highlight the last 3 years and show you what has happened in the past when the VIX rises along with the S&P 500:

2021:

We're nearly reached +0.50 on the correlation coefficient, which historically is a very high reading. The last time we moved above 0 in 2021 was in May, just before a 3% drop or so. Again, I'm talking SHORT-TERM. Note that once we saw a bit of selling, we went right back up.

2020:

The late-August signal was very important, while the others provided less of a solid warning. As I've said, they don't all work. But if you're most interested in protecting capital, I believe now is the time to be more cautious. I moved a lot to cash this morning an hour or so ago when I saw the rising 5-day moving average of the VIX.

2019:

The early-May signal in 2019 was a solid one. The current level of the correlation at nearly +0.50 is the second highest we've seen in the past three years. With options expiration on deck and the stock market already overbought, I believe we should be more cautious here, whether we actually move lower or not. Remember, I use technical analysis to manage my risk, not to guarantee results.

I'm going to pass on providing the rest of the DMR today as I wanted to get these charts out for you to see. I would have provided this warning a week ago, but I had not looked at this chart since probably the beginning of the month. I am not planning to add any stocks at this moment. I'm comfortable waiting this out.

Happy trading!

Tom