Is the stock market crash coming? Key indices to watch for the stock market turning point
Is the stock market crash coming? Key indices to watch for the stock market turning point – Review
In this video, I will walk you through two indices that I am using to spot the stock market turning point.
The first index is the US dollar index, DXY, the reason is simple, because the US dollar is the world’s reserve currency, if the dollar goes down, most assets would go up, because people are incentivized to sell their dollars to buy assets. And if the dollar rises, then most assets fall, because people are incentivised to sell their assets and buy back dollars. Now if we look at the dollar index chart and overlaid with the S&P 500 index chart, we can see that throughout the most period, when dollar trend down, the S&P 500 trend up, especially during the market crashes in 2000 and 2008, both times, when the dollar topped, within the next 3 to 6 months time, the stock market bottomed out and started major rallies afterwards. And in the recent covid crash, when the dollar topped, it marked almost exactly the bottom of the stock market.
Right now, the dollar is sitting at a strong support level, which it has bounced twice this year, one at the beginning of January, and another at the end of May. And previously, it also had bounced several times during January 2018 to april 2018, and we all know later in 2018 throughout Oct to Dec, we had the stock market deep correction of more than 20%. Will this happen again later this year? Well, if the dollar index keeps going up from here, then I would say we have a bigger probability of a deep market correction maybe towards the end of this year or the beginning of next year. But if the dollar index turns around and starts to trend downwards, then we probably will not have any major corrections and instead a big melt up in the stock market.
The second index is the Volatility Index, VIX, also known as the fear index or the smart money index, because when the volatility is high, it usually indicates lots of fear in the market, and when the volatility is low, it indicates the market is greedy. And as Warren Buffet says, “ Be fearful when everyone is greedy, and be greedy when everyone is fearful”. It’s a good way to check the sentiment in the market and prepare for potential swings. Most hedge funds managers are using this index to hedge their position against the potential market short term volatilities. Here is how you read the volatility index chart. The lower the number, the lower the volatility and the higher the number , the higher the volatility. And usually in a market uptrend, the volatility is relatively low. And the increased volatility usually means a sharp drop in the stock market. You see those volatility spikes on the chart, they all coincide with the market correction or crash. If we overlay the S&P 500 chart on it, you will see each spike corresponds to a major correction or a crash. And here is how I am using this chart, so in a stock market up trend, when the volatility bounces from either the yellow dash line or the white line, it usually is signalling a short term pullback could be on the horizon. If you want to hedge your position, you can either sell the security directly to the market to make those unrealized gains to realized profits, or you can sell covered call options to collect premium to lower your purchasing price of the underlying security. I don’t recommend selling naked calls, it is very risky, because you are using leverage through borrowing money to do so. When the volatility increases and hits the pinky line, it usually is a nice pullback on the up trend where you can add to your position through buying the dip. And if the volatility shot straight through the pinky line, then we probably experienced a major correction or a crash, and when volatility starts to go down, then it could signal a market bottom where we can aggressively buy back the shares.