By Joseph Adinolfi
Now that the Dow Jones Industrial Average has joined the S&P 500 in bear-market territory, U.S. stocks appear poised for another difficult week.
As a rampaging dollar and sharply higher Treasury yields help to hammer stocks, market technicians are one again looking for signs of an incoming bounce, and some say they may have found them in the Cboe Volatility Index — along with some signs from the options market — that could offer important clues
Helped by the ongoing selloff in stocks, the VIX /zigman2/quotes/210598281/delayed VIX +8.34% closed above 30 on Monday for the first time since June 21.
And if the volatility gauge holds above this level, it could send an important signal according to DataTrek Research co-founder Nicholas Colas. In a note to clients on Monday, Colas pointed out that although the VIX hasn’t yet topped 40 — a level that was reached during practically every significant selloff from the past 20 years before an enduring market bottom arrived — investors looking for signs of looming “tradeable” rally may not need to see the VIX print 40 before opening new long positions.
Why hasn’t the VIX reached 40 yet?
Why haven’t we seen Wall Street’s fear gauge move higher this year?
To some on Wall Street, the VIX has seemed conspicuously restrained given the level of realized volatility seen in the market this year. The S&P 500 has already seen 47 daily declines of 1% or more since the start of the year. That’s the most in a single year since 2002, according to Dow Jones Market Data. And there’s still three months to go.
That’s well above the 20-year average of 23.6.
And yet, the VIX has only topped out at 36 in June. Why not higher?
It’s difficult to say exactly, but ultimately it may not matter. Because as Colas pointed out, multiple closes above the 30 level have, so far this year, been a more reliable indicator of a looming turnaround. Colas explains more below:
“The VIX has only closed above 36 (2 standard deviations above its long run mean) once this year. That was on March 7th (36.5 close). It lingered above 30 for the next 5 trading sessions. That was a tradable low: the S&P 500 rallied 11 percent through the end of March.”
“The next time the VIX spent 5 days above 30 was May 5th – May 12th. The S&P then rallied by 6 percent through June 2nd.”
“The last cluster of +30 VIX closes this year came around the June 16th lows, and the S&P rallied 17 percent through mid-August.”
If this pattern were to repeat, investors may already be on the cusp of a “tradable” entry point.
But there are other important levels to keep an eye on that are tied to the Wall Street “fear gauge.”