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How We’ll Know the Worst is Behind Us

Yesterday, I talked about three technical reasons why there could be more selling in store for this market.

One of them was the action in the S&P 500 Volatility Index (VIX), also known as the market’s “fear gauge.”

Without getting into the details of how it is calculated, what you need to know is that the VIX essentially tells you how fearful traders are about a drop in the market over the next 30 days.

When the VIX is high, like it is right now near the 33 level, it tells you that traders are expecting the market to be relatively volatile.

When the VIX is low, it tells you that traders are not expecting much volatility.

But there’s a little more to it than that…

Rarefied Air

One thing that was left out of yesterday’s update was the fact that VIX readings above the 30-40 range are pretty rare.

Weekly Chart of S&P 500 Index (Top) & S&P 500 Volatility Index (Bottom) — Source: TradingView

In the weekly chart above, showing the S&P 500 Index on top and the VIX on the bottom since the Great Financial Crisis, I’ve identified the major instances when the VIX moved above the 40 level.

Now, the VIX doesn’t really break out and run like stocks since it has a baseline. Instead, a VIX over 30-40 typically means we could see an oversold bounce back to the upside.

As you can see, each time the VIX gets above 40, it’s usually an indication of a panic in the market and a near-term bottom for stocks.

The timing isn’t perfect by any means, but a move above 30-40 is typically a better buy signal than sell signal in the long-term.

The Fundamental Picture

Remember, the biggest things to me are the simplest ones.

Amidst the backdrop of rising interest rates and runaway inflation embarrassing the current presidential administration, it is clear it and the Federal Reserve are willing to crash the stock market in order to tame inflation.

Rising rates and a promise by the Fed to keep raising them, rampant inflation and indexes in bear markets, all making new lows on increasing volume…

All of these are clear signs of institutional liquidation. And it will only get worse before it gets better.

So, continue to watch the VIX. If we see a big spike like we’ve seen in the past, that could be the signal that things have gotten worse.

We need to see maximum bearishness and a spiking put/call ratio before we hit bottom.

It’s only at the point when all the weak hands give up and go fully bearish that the market will turn higher.

For all those reasons, I am not yet looking for any longs at this time.

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Ross Givens
Editor, Stock Surge Daily

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