Hey There Income Hunter,

 

The massive short covering rally in the major stock indexes over the past few weeks took the VIX down dramatically in a short time period.

 

After reaching 38 on March 8, the market’s “fear gauge” hit a low of 18.75 last Tuesday – and I think the VIX will bottom this week.

 

There are many reasons for volatility to pick up. Most importantly, think about how much the world has changed since mega-cap growth stocks and corporate bonds started to tank in November 2021.

 

Since then the underlying conditions impacting the markets have only gotten worse. That includes:

 

• The Fed is now hinting at 50 bps hikes in multiple meetings 
• Inflation is expected to remain hot for longer 
• There is  war in Europe 
• The economy and corporate earnings growth are slower 

 

Today, I’ll show you why the best low risk/high reward trade is to sell stocks in the days and weeks ahead. 

 

VIX Oversold In A Minefield of Risk

 

While Treasury bond volatility has been heading higher along with bond yields, the VIX is now below the lows from February

 

This often happens after a sharp downturn when FOMO hits the buy-the-dip crowd and they jump on the short covering bandwagon

 

What was missing during this rally, however, was any sign of real money flow buying  the market.

 

Notice the VIX chart below showing the vertical move down, which only took 11 days to cut the VIX in half. 

 

Do the Wave

 

I pay attention to potential third-leg moves, which can be very powerful …

 

And I recently saw the S&P 500 wave count chart below showing the possibility SPX is entering a third wave down.

 

However, we would need to see a couple of big moves down on high volume to confirm this signal, but it certainly something to keep an eye on. 

 

 

Bring It Home

 

The Fed has now convinced the market that 50 basis point hikes are coming in May and June … 

 

If that is true, this tightening cycle speed will be three times faster than any period over the past 30 years.

 

I can assure you this … a tightening move that fast will break the financial system down. 

 

I am not in the camp that is calling for an immediate crash. The markets may just chop around for a while, but I just want to level set you after last week’s price action indicated the short covering rally may have ended.

 

Stay tuned and have a great week …

 

Live and Trade With Passion My Friend,

Griff