When Volatility Is Exhausted, So Is the Selling

When Volatility Is Exhausted, So Is the Selling

BY MIKE BURNICK, CONTRIBUTING EDITOR, MARKET MINUTE

At times like this, reading the morning market headlines can give you a case of déjà vu…

This recent headline is a case in point:

“Stocks Week Ahead: Liberation Day Fallout, Jobs Data May Unleash Volatility Spike.”

Where have I heard that before? Oh yeah, yesterday, and the day before that, and…

It’s true that stocks have struggled to get any upside traction with all the negative headlines about tariffs triggering more market volatility.

But a funny thing happened to the S&P 500 on its way to retest the lows this week… volatility didn’t go along for a ride to new highs… and that’s telling.

 

As you can see in the chart above, the S&P 500 sank to a new low early this week, slightly undercutting the March 13 low.

But as you can also see in the upper panel of this chart, the CBOE Volatility Index (VIX), the stock market’s fear gauge, failed to move to new highs at the same time.

In other words, market volatility is receding even as stock prices ticked lower. That’s often an important tell that the market is at or near a tradeable low.

When volatility is exhausted, selling is soon exhausted as well.

And sure enough, in the past whenever the VIX cycles from an extreme, multiweek-range high back to neutral range or below, it has been a reliable buy signal for stocks.

In fact, this kind of VIX buy signal, the S&P 500 has been up 75% of the time over the next one to three months.

And the last four times this signal flashed (as shown above), the S&P averaged gains of 10.7% three months later.

Mike Burnick’s Bottom Line: While there could still be some downside ahead for stocks, history clearly shows that once volatility peaks and then recedes like it just did, stocks typically enjoy at least a strong relief rally, and at best hit new highs.

Good investing,

Mike Burnick
Contributing Editor, Market Minute