It’s time to bet on a bounce.
That may seem like odd advice coming from someone who has been so persistently cautious over the past few months.
But, the action over the past month has knocked some of the excessive bullishness out of the market. It has created the sort of oversold conditions that often precede intermediate-term rally phases. And, the Volatility Index (VIX) is on the verge of generating a buy signal just in time for the seasonal bullish tendencies to kick into gear.
Take a look at this chart of the VIX along with its Bollinger Bands…
VIX buy signals occur when the index closes above its upper Bollinger Band and then closes back inside the bands.
Bollinger Bands indicate the most probable trading range for a stock or an index. Whenever a chart moves outside of its Bollinger Bands, it signals an “extreme” condition – which is vulnerable to a reversal in the other direction.
In the case of the VIX, these extreme conditions trigger buy and sell signals for the broad stock market.
On Friday, the VIX closed above its upper Bollinger Band. When it closes back inside the bands, the VIX will generate a broad stock market buy signal. That could happen as soon as today.
We’ve seen six such buy signals – or buy signal clusters, when the VIX generated two or more buy signals within just a few days of each other – over the past year. Here’s how the S&P 500 behaved following each of those signals…
In every case, the stock market rallied in the days immediately following a VIX buy signal. Sometimes the rallies were short-term – lasting just a few days – like in January and February.
Sometimes the buy signals marked the start of intermediate-term rally phases lasting several weeks.
Either way, traders did well to buy stocks on the signal.
Of course, nothing in the stock market is guaranteed. If we go back far enough, we can find examples of VIX buy signals that did not play out profitably – at least, not right away.
For the most part, though, VIX buy signals have an excellent track record. And since the past six buy signals preceded 150-plus-point rallies in the S&P 500, there’s a good chance this next buy signal will play out profitably as well.
There are still plenty of reasons to be cautious on the stock market as we head through 2026 and beyond. But, for the next several days – and maybe even the next few weeks – the bulls have the advantage of a VIX buy signal.
Best regards and good trading,
Jeff Clark
Editor, Market Minute