Rare Stock Market Indicator Signals Potential Rally Ahead
- GCW
- Apr 20
- 2 min read
The stock market is currently experiencing significant volatility, with the S&P 500 down 14% from its record high earlier this year. However, a rarely seen stock market indicator, the CBOE Volatility Index (VIX), suggests that a substantial rally could be on the horizon for investors willing to navigate the current economic landscape.
Key Takeaways
The VIX recently closed at 52.3, indicating extreme market volatility.
Historically, VIX readings above 50 have led to substantial gains in the S&P 500.
The average one-year return following such high VIX readings is 35%.
Current tariffs imposed by the Trump administration may impact economic growth and market performance.
Understanding the VIX
The CBOE Volatility Index, commonly referred to as the VIX, measures expected volatility in the stock market based on S&P 500 options prices. It is often dubbed the "fear gauge" because high volatility typically coincides with market panic. The VIX has an average closing value of 19.5 since 1990, but it recently spiked to 52.3, a level not seen since January 1990.
Historically, when the VIX has closed above 50, the S&P 500 has shown remarkable resilience and growth. Here are the average returns following such high VIX readings:
Time Frame | Average Return |
|---|---|
One Year | 35% |
Three Years | 55% |
Five Years | 129% |
Economic Context
While the VIX indicates potential for a market rally, it is essential to consider the broader economic context. Each time the VIX has closed above 50 since 1990, the U.S. economy has been in a recession. This correlation raises concerns about the current economic climate, especially with President Trump's tariffs raising the average tax on U.S. imports to the highest level since 1901.
BlackRock CEO Larry Fink has suggested that the economy may already be in a recession, which could complicate the outlook for the stock market. The tariffs are projected to cost the average American household approximately $4,900 annually, potentially leading to stagflation—a combination of stagnant economic growth and inflation.
Investor Strategy
Given the mixed signals from the market, investors are advised to approach the situation with cautious optimism. Here are some strategies to consider:
Invest Gradually: Consider putting money into the stock market at a measured pace to mitigate risk.
Focus on High-Conviction Stocks: Stick to stocks that you believe in strongly, as they are more likely to weather market fluctuations.
Prepare for Volatility: Be ready to hold through potential declines, as the market may experience further turbulence before any rally materializes.
Conclusion
The recent spike in the VIX suggests that a monster rally could be on the horizon for the S&P 500, based on historical trends. However, the current economic environment, influenced by tariffs and potential recession, adds a layer of complexity to the investment landscape. Investors should remain vigilant and strategic as they navigate these uncertain waters.
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