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Fear is here on the whackiest day of the year (Wednesday).

Wednesday’s stock market drop - S&P 500 was down 2.95% - was attention grabbing. Not necessarily because it was a huge move, but because it was a relatively big move during a period of low volatility (the last big move was -3% on 8/5/24, call Wednesday's drop the big fish in a small pond).

Under the surface though, Wednesday’s decline packed a big picture, long-term punch:

- The VIX soared 74.04%, the biggest one-day gain ever

- 92.88% of NYSE-traded stocks declined

- 92.93% of NYSE-volume went into declining stocks

- The CBOE equity put/call ratio dropped to 0.45, one of the lowest readings of the year. This is weird because low readings are an expression of optimism, not seen on big down days.

I ran some studies to put the above numbers into context.

- The VIX recorded one-day rallies >60% only 3 other times. Two of those times, the VIX traded significantly higher (18.51 and 23.02) before spiking 64.90% and 61.64%. The other time, the VIX spiked from 11.15 to 18.31 (+64.22%). 1 of 3 signals occurred months before a major market top.

- 90% down days (when more than 90% of stocks decline on more than 90% of volume) are not that uncommon (>90% of stocks declined on 295 days, >90% down side volume occurred on 74 days).

- However, 90% down days are rare while the S&P 500 is trading within 5% of an all-time high. In fact, there were only 9 other instances.

- Never before did a VIX spike coincide with 90% down days and such a low CBOE equity put/call ratio reading. For data nerds like me, the chart below shows a number of sentiment readings to put Wednesday's performance in context (I’ll try to have more details on precedents with readings similar to Wednesday in Sunday’s Profit Radar Report).

What does all this mean?

I will dig deeper on the effect of 90% down days within 5% of an all-time high and large VIX spikes on stocks (charts showing prior signal dates along with S&P 500 along with performance tracker showing forward performance after prior signal dates) and publish my findings in Sunday’s Profit Radar Report update.

S&P 500 Update

My updates over the past few months have been less involved than usual. Why? Because I expected the market to be stuck in a slow and boring up side grind environment. Here is how the October 20 Profit Radar Report (PRR) explained it:

“A number of September PRRs mentioned the potential for a FOMO (fear of missing out) rally.

I would not be surprised to see a drawn out grind higher that will keep going until a sudden - seemingly out of nowhere - drop erases weeks of gains within days.

Obviously that’s an unthankful environment to be in because the grind higher is painful when not invested and the (supposed) eventual drop is painful when not exited in time.”

The outlook of the October 20 PRR has been confirmed many times in different shapes and forms in recent moths. Along the way I’ve done many studies to see if the evidence would suggest otherwise, but it did not. 

For example, a price pattern correlation study published in the December 11 Profit Radar Report had this conclusion: “The study harmonizes with our assessment of an eventual drop to erase a good chunk of gains.”

We've seen the 'eventual drop to erase a good chunk of gains' already come true. The big question is whether the scope of losses will be even bigger than what we've already seen?

I’m hoping to get some valuable additional insight from the above-mentioned 90% down day and VIX studies (stay tuned for Sunday's PRR), but the nutshell summary for now is this:

The prior S&P 500 breakout level and support is around 5,870 - 5,830. The S&P 500 - and especially Dow Jones Industrial Average (down 10 straight days) - are over-sold. The odds of a bounce are good.

However, if support at 5,870 - 5,830 fails, I would not fight the downward pressure as long as price stays below 5,870 - 5,830.

Silver Update

Precious metals have also given back a good junk of their 2024 gains. The iShares Silver ETF (SLV) is now over-sold against support. This is where a bounce could develop.

The Profit Radar Report recommended buying SLV on 3/14/2024 at 22.80 (green arrow) and selling on 12/9/24 at 29.21 (red arrow) for a 28.22% gain. We are looking for another good entry level.

To sum up, there is more to this week's decline than meets the eye. It is unique enough to spend the time identifying other periods of time with a similar constellation and see how the S&P 500 reacted to those.

The stock market is a reflection of human behavior, and studies have shown that human behavior tends to stay the same, which is why stock market price patterns reoccur (I might as well insert the worn out adage about history not repeating buy rhyming here).

If you want to get access to objective, purely fact-based, out-of-the box analysis and become the best-informed investor you know, check out the Profit Radar Report. 

The Profit Radar Report comes with a 30-day money back guarantee, but fair warning: 90% of users stay on beyond 30 days.

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