This Move by the Stock Market’s ‘Fear Gauge’ is Historically Bullish for the S&P 500
Understanding the Fear Gauge: Cboe Volatility Index (VIX)
Traders and investors alike are paying close attention to the latest movements in the stock market, particularly the trends associated with the Cboe Volatility Index (VIX), often referred to as Wall Street’s “fear gauge.” This crucial indicator measures the expected volatility of the S&P 500 over the next 30 days. Recently, the VIX experienced a significant drop, closing at a four-month low below 14 for the first time since early August. Such developments, especially following major market events like the presidential election, tend to bode well for the stock market’s performance in the months to come.
Significant Trends Post-Election
In the wake of the recent presidential election, investors have shown increased confidence in the market. Dean Christians, a senior research analyst at SentimenTrader, noted in a recent analysis that traders have been rushing to buy stocks in the final hour of trading over the past two weeks. The historical evidence suggests that when the VIX drops below 14 after previously spiking above 20, positive gains for the S&P 500 typically follow. The last notable instance of this occurred in fall 2023 when such a dip resulted in a 10% increase in the S&P 500 over the next three months.
Historically, when the VIX has cycled above 20, then fell back to below 14, stocks have consistently scored excellent returns over both the medium- and long-term horizons. Out of the last 26 occurrences, only one instance resulted in a negative outcome a year later—in 2015—while the median gain has been an impressive rise of 14.2%.
Last-Hour Trading Indicator
Further supporting the bullish outlook, SentimenTrader’s last-hour indicator has shown promising trends. This indicator tracks the cumulative direction of trading in the last hour of the trading day for the S&P 500. Recently, it has demonstrated gains in nine out of the last ten sessions, indicating bullish sentiment among traders eager to capitalize before the weekend.
The data reveals that in the past 21 instances where this indicator has exhibited similar behavior, the S&P 500 has risen 90% of the time over the following six months, even showing an impressive track record of 81% success over three-month periods since 1995. Such historic data leads Christians to indicate that these signals may suggest a constructive environment for stocks moving forward.
Comparisons to Previous Market Cycles
It is worth noting that this market behavior closely resembles the patterns following Donald Trump’s 2016 election victory. At that time, stocks surged into December, subsequently entering a range-bound period before resuming their upward trajectory. The markets are currently exhibiting a similar bullish sentiment, as the S&P 500 closed at a record high on Friday, enjoying a notable November gain of 5.7%, the best monthly advance of 2024. The index has rallied nearly 27% year-to-date and appears poised for continued growth.
An Encouraging Environment for Stocks
The weight of the evidence currently favors the bulls, as both the VIX’s recent movement and the last-hour buying interest demonstrate positive alignment with historical patterns. Christians emphasizes that the combination of these factors suggests a favorable setting for stock market performance in the near-term, notwithstanding the typical market volatilities often associated with upward trends.
In summary, the drop of the VIX below 14 amidst investor enthusiasm for stocks as reflected in last-hour trades casts an optimistic outlook on the S&P 500. As historical data indicates, similar conditions in the past have led to strong returns, supporting the argument that the current stock market scenario is ripe for growth. Investors would do well to keep a close eye on these trends as they navigate the path ahead.
