Why I am Sitting Out This Buy Signal

Mid-week market update: Two components of my Bottom Spotting Model flashed buy signals last Friday. The VIX Index spiked over its upper Bollinger Band, and the NYSE McClellan Oscillator reached an oversold condition.

In the past, the triggers of two or more component buy signals were signs of tactical bottoms. This time, my inner trader is staying on the sidelines. Here’s why.

One of the signals was a spike in the VIX above its upper Bollinger Band, which is an indication of an oversold market.  The VVIX, or the volatility of the VIX, briefly rose above 100 last week, which is the stress level as defined by Nomura cross-asset derivatives analyst Charlie McElligott.

I am closely watching the evolution of VVIX. When VVIX is elevated, the VIX can go on upper BB rides and oversold markets can stay oversold. It’s understandable why implied volatility is elevated as markets watch for updates ahead of the self-imposed tariff deadline Thursday.

Secretary of State Marco Rubio met with Swiss President Karin Keller-Sutter today over the 39% tariff rate imposed on Switzerland but she appears to have left empty handed. The Swiss trade surplus with the U.S. is largely attributable to the importation of gold bullion from Switzerland to America, which has little to do with manufacturing.

As well, Trump has slapped an additional 25% tariffs on India over Indian purchase of Russian oil for a total of a 50% tariff rate, though the implementation of the secondary levy was delayed for 21 days. China is another significant importer of Russian oil, and Trump revealed yesterday that there would be a deal with China soon. While the Indian secondary tariff announcement was silent about secondary tariffs on China for its Russian oil imports, the release did state that the Trump Administration “shall determine whether any other country is directly or indirectly importing Russian Federation oil”. U.S. envoy Steve Witkoff met with Russian President Putin today and it was described as productive. A White House official stated, “The meeting with Russia and Special Envoy Witkoff went well. The Russians are eager to continue engaging with the United States. The secondary sanctions are still expected to be implemented on Friday”. Trump’s deadline for a ceasefire in the war is also Friday. Stay tuned.

The other component that flashed a buy signal was the oversold condition of the NYSE McClellan Oscillator (NYMO). The NYMO oversold condition can be interpreted as the broad market has become sufficiently oversold that it’s due for a rebound. However, market breadth has been underwhelming during the advance off the April bottom. Both the equal-weighted S&P 500 and the mid-cap S&P 400 have lagged the S&P 500, and the small-cap Russell 2000 has been flat on a relative basis. In other words, we are seeing no breadth improvement despite the oversold conditions.

Small-cap performance is somewhat concerning from a breadth perspective. The small-cap Russell 2000 recently violated an uptrend. The index broke relative support out of a trading range, but regained the range this week. However, the small-cap S&P 600 remains below relative support, indicating relative weakness.

I am also seeing other non-confirmations of market strength. Why are gold stocks (GDX) making all-time highs when it’s supposed to be a risk-off asset? The all-time high has been achieved against a falling GDXJ to GDX ratio, indicating a lack of speculative among the junior golds.