Stock Market: Three “Panic” Indicators Warn of a Bigger Sell-Off Ahead

Three Panic IndicatorsSure, since the Dow Jones Industrial Average and the S&P 500 both went through their mini-crash in late August, the stock market has rallied back somewhat. But the fact is the market is still down 10% from its 2015 high. And three stock market indicators I follow are warning of an even a bigger market sell-off ahead.

These three indicators (I give you charts on all three below) are the “fear index,” the “TRIN,” and the “Exposure Index.”

Stock Market Volatility Shooting Through the Roof

The chart below is of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), often referred to as the “fear index.”

Volatility Index Chart

Chart courtesy of www.StockCharts.com

The VIX currently stands at the highest level since 2011. Interesting to note here: in mid-August, when key stock indices were witnessing wild swings, the fear index jumped to the highest level since 2009!

The VIX is saying investors are no longer complacent about the stock market; they have become fearful again. This is important because when investors are bullish, they see market pullbacks as an opportunity to buy. When investors are fearful, as the VIX now shows, they tend to sell on market weakness, pushing stock prices down further.

Key Short-Term Indicator Warning of Crisis Ahead

The Short-Term Trading Arms Index is pretty much saying that a crisis is ahead. This index is also referred to as the “TRIN.”

At the most basic level, the TRIN is a reflection of the number of public companies that have their stock prices declining and rising in value as it relates to their trading volumes. The index is calculated daily. A value above one on the TRIN is considered to be bearish and a value below one is considered bullish. With this said, please look at the following chart.

Short Term Trading Arms Index Chart

Chart courtesy of www.StockCharts.com

The TRIN currently stands at its highest level since the end of 2011.

To bring some perspective to this, at the bottom of the chart, I have plotted the S&P 500 and how it performed when the TRIN peaked (circled areas at top of the chart). Whenever the TRIN reached the level it currently stands at, we saw significant fluctuations in the S&P 500.

“Smart Money” Leaving the Market?

It is critical to look at what the so-called “smart” money is doing. Are they getting into stocks or out of stocks? The logic behind this is very simple. Institutional and large-ticket investors have substantially greater buying power than an average investor. When big investors are selling stock, their actions can impact the market if there are not enough buyers on the other side of the market.

Below is a chart of the National Association of Active Investment (NAAIM) Exposure Index. This index plots the percentage of U.S. stocks in which active money managers hold positions.

NAIIM Exposure Chart

Chart courtesy of www.StockCharts.com

Currently, money managers hold just 28% of their portfolio in stocks. This is the lowest amount since early 2012 and late 2011. What is also interesting to note here is that their portfolio consisted of almost 100% stock in February of this year. In a matter of six months—February to August—their stock holdings have plummeted roughly 70%!

Why have institutional and big investors gotten so far out of the market? A small investor needs to really ponder this. What are they concerned about that small investors don’t see? It’s something to think about.