Editor’s note: Today’s essay comes from our corporate affiliate Stansberry Research…
DailyWealth Trader editor Chris Igou first shared these insights with his subscribers on November 16. Like Marc Chaikin, he expects the market to make big moves in 2024.
In this essay, Chris explains how he measures investor fear. Then, he covers when this so-called “fear gauge” hit its last extreme – and what that means for the markets from here…
Investor fear spiked in October…
The S&P 500 Index was in correction territory. And investors were on edge as the broad market fell hard for the first time in 2023.
Today, the index is bouncing back. The fear we saw in October is starting to fade. And the market’s “fear gauge” shows a new run higher is likely starting.
Specifically, it suggests a double-digit rally is underway. And it’s a good reason to bet on continued gains in the market.
Let me explain…
One of the simplest ways to measure fear is the CBOE Volatility Index – or the “VIX.”
When the market starts to crash, the VIX runs higher. A reading of about 20 means fear is elevated. And if it’s above 30, fear is extreme. Anything above 40 marks a historic event.
The chart below shows the VIX in action. Each time the S&P 500 pulls back in a big way, the VIX jumps…
The quicker and sharper the downturn, the higher the VIX is likely to go.
A spike in the VIX tells us investors are panicking. But we can take it one step further to know when stocks are likely to rally afterward…
You see, once fear starts to go away, that can indicate more gains are on the way. And we can look to two decades of data to prove it.
Let’s use the most recent case as our guide…
The VIX rose above 20 in October and then pulled back. It’s now roughly 13.
I recently tested two factors to see if this action is “bullish” for the market…
First, the VIX had to be above 20 within the past month. Second, it had to fall below 15 for the first time in a month.
Since 2000, buying after these kinds of signals has been a good idea. Check it out…
The S&P 500 hasn’t done great since 2000. It has returned just 4.8% per year. But buying after the VIX drops from above 20 to below 15 results in a much better return…
These cases typically lead to a 4.1% gain in six months. And over the next year, they usually translate into a 9.9% return.
Those returns might not be home runs. But it’s a strong case for the broad market.
Importantly, this indicator also has a high win rate over the 23 years we studied…
We’ve seen 22 other cases like this since 2000. Buying after those periods led to a six-month gain 77% of the time. And for the one-year return, the win rate jumps to 86%.
That’s about as reliable as an indicator gets. And it bodes well for the S&P 500 over the next year.
Stocks have continued rallying since this indicator flashed in recent weeks. But history shows that more gains are likely in the coming year.
Get in as the next leg up begins. Don’t miss out as stocks climb higher.
Good investing,
Chris Igou
