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If there’s one factor {that a} bear market – secular or cyclical – feeds on, it is worry. The additional the drop, the larger the spike we see within the Volatility Index ($VIX). From the CBOE.com web site, the VIX “measures the extent of anticipated volatility of the S&P 500 Index over the following 30 days that’s implied within the bid/ask quotations of S&P choices. Thus, the VIX is a forward-looking measure…” So let’s be clear about this. The VIX does NOT measure what’s taking place now or what simply occurred final week. As an alternative, it seems to be ahead to find out anticipated volatility. Excessive volatility is mostly related to falling fairness costs and low volatility sometimes accompanies rising fairness costs.
As worry dissipates, anticipated volatility drops, and bear markets finish. That is the historic method. Let’s begin off by wanting again to the monetary disaster in 2008 and the way the spiking VIX unfolded:
The VIX topped in October 2008 and although the S&P 500 hit two lower cost factors, the bear market ran out of sellers as worry got here tumbling down in late 2008 and into the primary quarter of 2009.
In the course of the market turbulence in 2014-2016, we noticed a considerably comparable sample:
This autumn 2018 was a really brief cyclical bear market (lower than 3 months), as was the pandemic-led promoting in March 2020 (4 weeks), so there actually wasn’t a lot time to judge the VIX at varied low factors, however at present we’re seeing an analogous sample within the cyclical bear market of 2022:
However the motion on the VIX was actually unusual this week. The S&P 500 noticed promoting strain as soon as once more, but the VIX completed very near a 3-week low. Take a look at this 1-month 30-minute chart:
From mid-day on Thursday by the early morning Friday, the S&P 500 fell from 3820 to 3750 and the VIX was dropping proper together with it. That is extraordinarily uncommon habits. The VIX is wanting forward and it is pricing in much less volatility. That implies that we’re being given a sign of a rally forward. That is the rationale the VIX goes down. Much less volatility means larger fairness costs.
We’re heading right into a contemporary quarterly earnings season and I will be that includes one firm that I imagine is poised to make an enormous run into its quarterly earnings report later this month. To examine it in our subsequent e-newsletter article, merely CLICK HERE and join our FREE EB Digest e-newsletter. It solely takes a reputation and e mail deal with. There isn’t any bank card required and it’s possible you’ll unsubscribe at any time.
Glad buying and selling!
Tom
Tom Bowley is the Chief Market Strategist of EarningsBeats.com, an organization offering a analysis and academic platform for each funding professionals and particular person buyers. Tom writes a complete Each day Market Report (DMR), offering steerage to EB.com members day by day that the inventory market is open. Tom has contributed technical experience right here at StockCharts.com since 2006 and has a elementary background in public accounting as nicely, mixing a novel ability set to method the U.S. inventory market.
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