The good times for stock market investors may soon be over, at least for now, according to Helene Meisler, a technical analyst who studied in the 1980s under legendary technician Justin Mamis and later worked at Goldman Sachs.
Meisler has studied the markets for over 40 years, helping professional money managers better understand the markets’ inevitable machinations. In Meisler’s latest alert, she highlights a short-term signal that stock market traders ought not ignore.
The CBOE volatility index, or VIX, has fallen into complacency, a signal that investors may have gotten too comfortable with the S&P 500’s relentless rise from its summer low. The VIX’s daily sentiment index, or DSI, has touched the mid-teens, a yellow flag in Meisler’s view that may signal a short-term sell-off.
Meisler highlights a warning sign lurking in the VIX
Over the years, Meisler has come to rely on various technical indicators to gauge when investors become overly pessimistic, suggesting it’s time to buy, or optimistic, suggesting a good time to lock in some profit.
The VIX is one of those indicators. The volatility index measures how much investors are willing to pay for protection over the coming 30 days based on S&P 500 option prices. If investors are getting antsy, they’re willing to pay more for protection, causing the VIX to rise. If they’re complacent, the VIX drops.
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Most of the time, the VIX stays pretty neutral. It only really attracts widespread media and investor attention when it, or measures such as the Daily Sentiment Index, or DSI, reach extremes.
“The Daily Sentiment Indicator (DSI) for the VIX finally broke under 15 and moved to 13. A flashing red light would be a single-digit reading, but I consider a sub-15 reading a flashing yellow light,” wrote Meisler in a post on TheStreet Pro.
Created in 1987 by market analyst Jake Bernstein, the DSI is considered a leading indicator because it measures changes in the futures market to gauge sentiment. When DSI is above 85 or below 15, it often points to an impending top or a bottom.
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Meisler VIX worry gets conviction from other technical indicators
Meisler says a single-digit DSI is a red alarm and an ideal signal for a reversal, suggesting the indicator is signaling risk rather than a guaranteed drop. Everyone, myself included, who has tracked the markets for a few decades, knows there are no guarantees when it comes to calling short-term tops or bottoms.
That said, there is other evidence that stocks may be setting up for a dip, namely the VIX put/call ratio, and the National Association of Active Investment Managers (NAAIM) Survey.
Meisler says that the 21-day moving average of the VIX put/call ratio dipped below 0.40, something that happened as recently as twice in 2024.
“In January 2024, we got a few days of downside as the S&P lost 100 points over the course of four trading days, about two percent. However, in July of 2024, the S&P embarked on a ten percent drawdown,” wrote Meisler.
It’s also telling that the NAAIM Survey shows professional money managers particularly bullish enough to have begun buying stocks on margin, something that can correlate with short-term market tops.
Meisler says the NAAIM index is currently 102.66 (readings above 100 indicate buying on margin), and the last time that happened was July 2024.
What investors should do given the VIX signal
Most investors shouldn’t read too much into the stock market’s short-term pops and drops. Dips are incredibly common, with 5% pullbacks happening in 93% of calendar years since 1980, according to Fidelity. Yet stocks have always eventually rebounded, suggesting that overreacting to short-term fears hasn’t been a profitable decision over time.
However, short-term traders and position traders, who actively manage money, can consider this signal a good reminder to lock in some profits to raise a bit of cash that can be redeployed later.
That could be a savvy move given the old Wall Street adage, “sell Rosh Hashanah, buy Yom Kippur.”
The data suggests only modest declines between the two holidays, making the adage more reflective of seasonal weakness than anything else. Still, we could start to hear more chatter about it soon if the VIX is right that we’re about to see a lift in volatility amid a pullback.
“If that adage is to come to pass, it means we should start to see some weakness in the market in the next week or so,” wrote Meisler.
