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 index down 14% from its record high earlier this year. However, a rarely seen stock market indicator, the CBOE Volatility Index (VIX), has sparked optimism among investors, hinting at a potential monster rally in the coming year.
Key Takeaways
The VIX reached a high of 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 economic conditions, including tariffs, may impact future 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 called the "fear gauge" because high readings typically coincide with market panic and sell-offs.
High VIX Readings: Indicate increased market volatility.
Low VIX Readings: Suggest a more stable market environment.
Historically, the VIX has averaged a closing value of 19.5 since 1990, with extreme readings above 50 occurring only 75 times, or less than 1% of trading days. Notably, every time the VIX has closed above 50, the S&P 500 has seen gains in the following years:
Time Frame | Average Return |
|---|---|
1 Year | 35% |
3 Years | 55% |
5 Years | 129% |
Current Market Conditions
As of April 8, the S&P 500 closed at 4,983, coinciding with the VIX's peak. If historical trends hold, the index could rise to approximately 6,727 by April 2026, representing a potential upside of 27% from current levels.
However, the backdrop of rising tariffs under the Trump administration complicates this outlook. The average tax on U.S. imports has surged to 28%, the highest level since 1901, raising concerns about economic growth and inflation.
The Impact of Tariffs
While the historical data suggests a bullish trend following high VIX readings, the current economic landscape is fraught with uncertainty due to tariffs:
Potential Economic Slowdown: Tariffs may hinder GDP growth and lead to stagflation.
Increased Costs for Consumers: Estimates suggest tariffs could cost the average American household nearly $4,900 annually.
Conclusion
In summary, while the VIX's recent spike indicates a potential for a significant stock market rally, investors should remain cautious. The historical performance of the S&P 500 following high VIX readings is promising, but the impact of tariffs and economic conditions could temper these gains. Investors are advised to approach the market with measured optimism, focusing on high-conviction stocks and being prepared for further volatility ahead.
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