As a general rule, I am not in favor of shorting the market when $VIX is “too low.” That is usually a loser’s game, as the market doesn’t turn downward until $VIX begins to trend upward. However, there is a combination of factors that we researched a long time ago (at least 10 years) that is now coming up again.
The broad stock market, as measured by several indices, but particularly by the S&P 500 Index ($SPX) has broken out to new all-time highs. Other indices that have done the same include the Dow ($DJX), NASDAQ Composite, NASDAQ 100 ($NDX), Midcap 400 ($MID), and the NYSE Index.
The broad stock market, as measured by $SPX, has traded in a very narrow range since early December (with one very brief excursion below the range in late December). That range is essentially 2250 to 2280, an amazingly small range for a 5-week period of time. As a result, realized volatility has declined to very low levels.
After all the positive seasonality that surrounds the end of a year (Post-Thanksgiving rally, Santa Claus rally, January Effect), it is probably not too surprising to learn that there is a system that relies on a bearish seasonal pattern. That is, after about 8 to 12 trading days into a new year, the stock market – particularly, the NASDAQ market – tops out and trades lower for a week or so. This year, with NASDAQ being so strong, one wonders whether the system will work. But there have been times in the past where the system has worked even when NASDAQ was relatively strong in comparison to SPX. The system is sometimes known as “The January Defect.”
The stock market has split into two parts recently. Most of the major averages are moving sideways, but staying within easy range of new all-time highs. The NASDAQ Composite, however, and its smaller companion the NASDAQ-100 ($NDX) have been making new all-time highs frequently. This should be a good thing.
The $SPX chart remains bullish in that its trend lines are sloping upwards and support has held. There is support at 2233, and then at 2210 and 2190 below that.
The media confuses the various seasonal trading patterns that occur in January, but the January Barometer states that “As goes January, so goes the year.” This adage is about to be tested again this year.
