A major market indicator is flashing a warning sign that was also seen before the 2008 financial crisis.
The VIX index, after trending lower for years, has begun a significant upward move.
In 2007, it rose dramatically from 10 to 30 between February and July.
This preceded a market peak in October 2007, followed by a devastating 60% decline.
Interestingly, today’s pattern looks strikingly similar.
The VIX recently touched a low of 12 and has shown considerable upward movement while the market reaches all-time highs.
But first, what exactly is the VIX?
The VIX measures option prices on the market, including both calls and puts.
When traders place bigger bets through options, it signals expectations of increased market movement, whether up or down.
Known as the market’s “fear gauge,” it rises when traders expect larger market moves ahead.
Typically, when the VIX spikes, the stock market tends to drop.
That’s because when the market is going down it usually sees a larger move.
Historical Warning Signs
The VIX has proven its predictive power multiple times over the years…
In 2007, VIX rose while market made all-time highs.
This pattern developed over several months and eventually preceded a 60% market decline.
Fast forward to 2022, the VIX surged between October 2021 and January 2022.
The market was reaching all-time highs during this surge, but then fell by 25%.
Traders who listened to this warning protected their capital during this decline.
At Bravos Research, we’re helping clients navigate the market by looking out for such signals and taking an active position management and strategic profit-taking approach.
Our comprehensive approach includes:
- Step-by-step trade guidance
- Strategic entry and exit points
- Professional risk management
We recently booked a 17.4% gain on our $WPM position.
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Not All VIX Spikes Mean Doom
It’s important to note that while a rising VIX typically signals a market decline that’s not always the case.
In 1995, the VIX rose from 10, similar to today, but what followed was a 5-year market melt-up that created significant profits for positioned investors.
So, how do we know what signal a rising VIX is sending today?
The key difference lies in the Fed funds rate.
The Federal Reserve Factor
Today, the Fed is cutting rates without an economic recession.
This is exactly what happened back in 1995.
In fact, a similar development was also seen in 1984, which led to a market melt-up.
This is because rate cuts stimulate economic growth that leads investors to respond positively.
Economic Warning Signs
But, despite the ongoing rate cuts, there are economic indicators that are still flashing a warning sign.
For instance, unemployment rates are rising across multiple states, similar to past recessions.
Multiple recession indicators suggest that an economic recession is likely to begin by end of 2024.
Our Current Strategy
Today’s environment has potential for a melt-up, but also a high risk for a recession.
So, we’re taking a balanced approach that considers both bullish and bearish scenarios.
While capitalizing on current market momentum, we’re booking profits from our August/September positions.
Our outlook depends on one crucial distinction:
- If no recession materializes, we could see a 1995-style melt-up
- If recession hits, prepare for a significant market decline
In the short-term, we turned bearish because of multiple warning signals that we outlined in an earlier article titled “The Stock Market Is About to Get Rug Pulled (This Week)” (found here).
We booked profits on a lot of our Trades, such as $IWM for 9.1% profit, and even initiated some shorts that are now in profit.
Now we’re closely watching for bottoming signs to add setups that we’ve had on our Watchlist.
At Bravos Research, we’ve made some incredible trades throughout this bull market:
- Average profit in 2024 = 17.37%
- Average loss in 2024 = 3.78%
We send buy and sell alerts on individual stocks, ETFs, crypto, and commodities.
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