Record High VIX Calling For A Market Bottom?

Today the markets experienced fear levels only seen three other times since the crash of 1987. The CBOE Volatility Index (^VIX) hit an intraday high of 56.32 about one hour ago as the Dow (^DJI) crashed through 10,000 and the S&P 500 was in danger of breaking 1000. Since that time the markets have firmed up and we believe a short-term bottom has been put in place. Based on both the VIX and other potential catalysts in the coming days, the probability of a short-term rally is very high.

Let’s turn to the numbers of the VIX. The last three times the VIX traded at this extreme level was 7/24/02, 9/21/01, and 10/8/98. Each time the VIX traded between 56.74 and 60.63 intraday, however the highest close on the VIX on any of the three days was 48.50. What this indicates is that the extreme fear led to late-day buying.

But we want to look at more than one day, so I took the average gain of the three instances in the following timeframes after the low of the day the VIX spiked for the S&P 500. After one week: +14%, one month: +20%, three months +25%, six months: 26%. As you can see each period returned a significant gain for the market.

I am not running out and buying today for clients, but rather looking to sell into the highly probable bounce in the coming days/weeks. This will give us a chance to raise cash and lessen the exposure to the market and reallocate the portfolios.

Have a great day.

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