Phases & Cycles Market Outlook – Aug 20, 2021
The market has gone through weak periods 3-6 days before option expiry days for most of this year. This is happening again. During this time, the market is providing conflicting statistics, which is heralding negative market action, suggesting the onset of a serious corrective action. For example, on August 12th the S&P 500 (SPX) Index hardly moved for the day, and yet there were twice as many Declining issues (DI) than Advancing issues (AI). Two days later, when both the DJI and the SPX were ahead at the closing, there were twice as many DI than AI.
During the four preceding days (August 16th to 19th) both the SPX and the NASDAQ declined 2.5%, TSX lost 1.9% and the VIX advanced from 15.21 to 23.98 (+58%). However, as of this moment, the VIX is retreating to 18.55.
We wrote a report entitled “The Best Tool to forecast the end of a sell-off” in October, 2020. The following is excerpted from that report, to explain the workings of the VIX and the significance of its current moves.
Which Index helps to forecast the climax of a market sell-off? It is the VIX. Contrary to common beliefs, the VIX does not forecast a market top; the VIX is best used to forecast the end of a decline.
As the charts on the following page indicate, during the market advance the VIX remains in a “resting position” between 10 and 25. However, once the market starts a decline, the VIX begins to rise so that each day’s reading is higher than the previous day.
This continues until the VIX has a significant high, followed by days that it’s high for the day is lower than the previous day’s high. This action signals the end of the sell-off, the selling climax, the bottom.
Look at the actions indicated with an “X” in January 2009, early 2010, late 2011, late 2015 and early 2016, at the end of January and at the end of December 2018 and March 2020 on the SPX & VIX charts. The sharp rise and the consequent decline signal the reversal.
OUTLOOK
The sector rotation continues in both New York and Toronto. Two groups stand out at this moment, the Insurance Sector, especially Manulife and SunLife; and the Steel Sector in New York such as Cleveland-Cliffs (CLF) and Nucor (NUE), and two newcomers such as Alcoa (AA) and U.S. Steel (X). The first three are on our List of Investment Ideas.
PAC-20-198; MKT-501; August 20, 2021
Ron Meisels
Phases & Cycles Inc., 4000 Boul. De Maisonneuve West, Suite 2010, Montreal, QC, H3Z 1J9
Tel.: (514) 393-3653. E-mail: RonMeisels@phases-cycles.com
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