CNBC’s well-known financial host Jim Cramer said on Friday (21st) that technical analysis of the VIX, a panic indicator, shows that the S&P 500 will be challenging in the short term, and the sell-off is likely to continue into early February.
The S&P 500 fell 1.89% to close at 4,397.94 on Friday, its third straight weekly loss, below its 200-day moving average and down 8.3% from its all-time high in early January.
Meanwhile, the CBOE Volatility Index (VIX), known as the “fear gauge,” surged to nearly 29 on Friday, up from 17 a week ago.
The S&P and VIX indices typically move in opposite directions, and OptionPit.com founder Mark Sebastian observes that the S&P sell-off could continue into early February.
Almost every time there is a big sell-off in stocks, VIX futures tend to go into backwardation around a third of the way through, Sebastian said, and the sell-off continues for a few weeks.
Well-known financial and financial expert Jim Cramer also believes that in the past three weeks, the VIX has risen relentlessly, which is bad news for the stock market.
Cramer explained that when the VIX is rising like it is now, it means traders are buying protection for themselves, and even on days when the market has successfully rebounded (in previous weeks), they are not going to unwind those safe havens, but buying more insurance.
Sebastian pointed out that the technical analysis of the VIX paints a disturbing story that the VIX is beginning to enter a backwardation (backwardation) state, with January VIX futures currently higher than February VIX futures, and February futures are starting to be higher than March futures.
Cramer said the last time such a rare VIX backwardation occurred was in March 2020, during the COVID-19 outbreak, and it also happened in October 2018, when Wall Street was spooked by the Fed’s actions. The VIX trend shows ominous omen, because investors are not facing a surge in the VIX, but a inflation in the VIX, which is always longer than investors hoped.