You’ve seen it before.
That look that just says, something aint right.
Whether it’s your kids lying to you, another person going behind your back, or some genuine bad news. You’ve seen the look people give you when something is up.
And right now, the market is saying something is up.
This is no normal environment.
Today, I’ll explain why this look is so troubling and how to take advantage of it.
Enemy #1 – Inflation
If you are not seeing the look, don’t worry. I know what to look for.
That’s why this may not be national news just yet. But trust me, things are rumbling underneath the surface.
For starters, what happened today?
That was how investors reacted to the worst day for stocks in over two years. I’m serious. If things were all honky dory, investors would have jumped in buying hand over fist right now. Sure, the Fed is going to hike interest rates next week. That’s been known since the last meeting.
Investors are starting to realize the underlying weakness already hitting the economy, and then thinking about how much more damage the Fed can do as it continues to hike rates.
It ain’t pretty.
And the day before the inflation report, Monday of this week, the CBOE Volatility Index (VIX) was acting up.
It was heading higher even though the broad stock market was higher as well.
Knowing how the VIX works, normally it rises when the market is down. It’s a reflection of how antsy investors are to buying put options. It’s also why the VIX has been given the name as the fear index.
So, why would it be up while the market is higher?
It’s because investors were buying protection from what turned out to be a disastrous inflation report. At least in the markets eyes.
The number one enemy for the Fed right now is inflation. Not the economy.
As long as there’s inflation, the Fed can’t let off the brakes they are applying to the economy.
That’s not a good mix.
Here’s what you can do about it.
#1 Indicator to Watch NOW!
For starters, you can get your copy of my Bear Market “Guide to Thrive” Inflation Edition report if you have not done so already.
It’s a great, high-level look at what is going on, and three simple indicators to watch as we navigate the volatility.
In the short-term, you need more reactive analysis to this market.
Bear markets are famous for experiencing the biggest swings in the market, in both directions.
That means going all out bearish means you miss out on some of those neck-breaking rallies. But, staying bullish through this is a death wish. You don’t stand a chance.
So, where’s the middle ground.
For me, it’s watching the VIX. I’m more bearish than ever right now, but I’ll still take some flyers on bullish trades while the VIX is under 30.
Over 30 and forget about playing the rally. It is signaling a much steeper drop could be on deck. I’ll be preparing for that when we are over 30.
If the VIX somehow manages to get back under 20 in this market, I’m a buyer. I’d switch, almost immediately, from the most bearish I have ever been, to outright bullish.
That’s how powerful these levels are.
Now, I would continue to watch it. I know the market is prone to head fakes. And I’m fine with that.
If the VIX breaks back above one of these key levels, I can adjust on a dime and be ready.
It’s part of a trader’s mentality.
I’ve talked about the VIX a lot lately, but it’s only because it is my #1 indicator to watch. Keep up with me on Twitter, @ChadShoopGuru, to get my #VIXWATCH recap each day after the market closes.
That’s all for today.
Let’s make some money!
Chad Shoop, CMT
Editor, Bank It or Tank It