Tom McClellan sees some major red flags that the stock market may be headed much lower in coming weeks. According to McClellan, the number of shares outstanding in the iPath S&P 500 VIX Short Term Futures TM ETN (NYSE:VXX) has been an excellent leading indicator for the S&P 500 lately, and the most recent numbers are extremely bearish.
VIX futures ETF extremely popular right now. Can this possibly end well? McClellan tweeted on Tuesday along with a chart showing the inverse correlation between the S&P 500 and the number of outstanding VXX shares in recent years.
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If VXX worked like other ETFs, then as the SP500 falls and the VIX rises, more investors would chase after it and drive up the total number of shares outstanding in VXX, McClellan explained back in February. But instead we see the opposite behavior.
As the chart shows, a low level of VXX shares outstanding has typically marked market bottoms in recent years, and a high number of shares outstanding has predicted market tops.
Although McClellan can offer no explanation as to why this market behavior occurs, he urged traders not to ignore the indicator simply because it isnt particularly intuitive.
The current number of VXX shares outstanding far exceeds the number of shares outstanding prior to the S&P 500s early 2016 selloff, a potentially very bad sign for the market.
Disclosure: the author holds no position in the stocks mentioned.
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