In March, the market’s “fear gauge” hit its highest level since 2008.
That was during the height of the coronavirus pandemic. The market was crashing. And folks were terrified.
Today, fear in the market has subsided as stocks close in on new highs. It’s more than that, though…
This fall in the fear gauge is actually a sign of more gains ahead. In fact, you can expect double-digit gains in the S&P 500 Index over the next year, based on what’s happening right now.
Let me explain…
When uncertainty shows up in the market, people get scared… and the VIX starts to move higher.
It can be a great contrarian indicator, showing when folks are giving up on stocks.
Now, we know we want to buy after folks get scared. But remember, uncertainty can always drive the VIX higher than you can imagine.
So instead of just looking at when the VIX hits new highs, we want to see what happens when that fear starts to dissipate.
Again, the VIX spiked in March as pandemic fears took over. But it has fallen recently. While this measure peaked above 80, it’s now below 35 again.
To see what happens when fear subsides, you need to look at every time that the VIX rose above and fell back below a level of 35… like we saw recently. These spikes highlight fear extremes and let us know when things are getting back to normal.
Now that there’s less coronavirus uncertainty in the market, the VIX is back down. Take a look…
You can see the massive spike in the VIX in March. But levels have fallen dramatically since then.
Historically, when the VIX falls back from record highs, it’s a good sign for U.S. stocks. And that means now is actually a great time to buy.
Since 1990, we’ve seen 41 other times that the VIX has rallied above and fallen back below 35. And buying after these extremes often leads to outperformance…
Similar extremes have led to winning trades 82% of the time over the next year. And history shows you can expect solid outperformance compared with a buy-and-hold strategy…
Previous instances have led to 6% gains in six months and a solid 12% gain over the next year. That crushes the typical 7% annual return.
Simply put, the VIX falling back to more normal levels is an “all clear” sign to own stocks, based on history. And that’s happening right now.
It might seem crazy, but now is a fantastic time to buy. History says more gains are likely on the way.
Good investing,
— Chris Igou
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Source: Daily Wealth