The Volatility Index (“VIX”) just triggered a “buy” signal.
Over the past few weeks, the VIX has spiked higher.
[ad#Google Adsense 336×280-IA]It has climbed more than 50% from below 14 in early June to above 21 last week. Quick moves like this usually happen during periods of intense uncertainty in the markets.
The current uncertainty is due to an upcoming referendum vote in Europe. The United Kingdom will decide Thursday whether to stay in the European Union or leave, a pending move that has been nicknamed “Brexit” in recent years.
This sort of major event has the potential to trigger a huge move in the world’s stock markets.
So it makes sense that we’re seeing a spike in the VIX – the market’s “fear index.”
But it is surprising that the VIX is now saying it’s time to buy stocks. Let me explain…
Take a look at this one-year chart of the VIX…
The VIX generated a buy signal on Friday. Buy signals occur when the VIX closes above its upper Bollinger Band and then comes back down inside the bands. The blue arrows on the chart show when that has happened over the past year.
Here’s how the S&P 500 has responded to each of those signals…
Each VIX buy signal over the past year marked at least a short-term bottom for stock prices… and kicked off a rally that lasted for at least several days. Going out a few weeks from each signal, though, the results are mixed.
Only the buy signal in February marked an intermediate-term bottom in the stock market – a point at which the S&P 500 was higher several weeks later. The short-term rallies triggered by the rest of the signals were followed by a period of lower prices or a retest of the lows after the initial push higher.
With Monday’s big rally, the most recent buy signal is off to a promising start. There are likely a few more days of upside ahead. But traders should be quick to take any short-term profits. They may disappear a few weeks from now.
Best regards and good trading,
Jeff Clark
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Source: Growth Stock Wire