Volatility Index (VIX) sell signals are rare – happening maybe only once per year. But, “near-sell-signals” are becoming a monthly event.

We got a near-sell-signal in May, and the S&P 500 lost 120 points in three days. We got one in June, which knocked 200 points off the index in about one week. The near-sell-signal in July caused a 90 point drop in the S&P in four days.

Now we’re getting a signal here in August. The only question is whether this is just a near-sell-signal which will lead to just a modest decline, or are we on the cusp of a real VIX sell signal which will cause a more severe sell off?

Look at this VIX chart…

VIX sell signals occur when the index closes below its lower Bollinger Band (BB) and then closes back inside the bands. That hasn’t happened yet in 2020. The lower BB has held as support for the past several months. So, the market has avoided a sell signal.

Notice, though, that each time the VIX has approached its lower BB (indicated by the blue arrows) as it’s doing right now, the index has bounced higher off of the band. These near-sell-signals have coincided with sharp, sudden declines in the stock market.

With the VIX testing the support of its lower BB again, the broad market is headed for at least another quick decline. The alternative would be for the broad market to continue to rally, thereby pushing the VIX below its lower BB and setting the stage for a real sell signal.

Either way, the situation is tenuous for the stock market.

Best regards and good trading,

Jeff Clark
Editor, Market Minute