(Bloomberg) — A contrarian indicator of stock-market volatility is sending an encouraging sign for US equities in the coming weeks.
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The Cboe Volatility Index, or VIX, fell into a “death cross” technical formation on Friday for the first time since August, when US equity markets swooned on renewed fears that the Federal Reserve would keep aggressively raising interest rates to fight inflation.
The VIX, dubbed Wall Street’s fear gauge, measures market expectations of 30-day volatility and can serve as an important indicator of how investors are feeling. The so-called death cross pattern appears when the VIX’s short-term 50-day moving average slides below its 200-day moving average.
For individual stocks or indexes, a death cross is often considered bearish. But when it happens to the VIX it can be a hopeful sign for equities, according to Jeffrey Hirsch, editor of the Stock Trader’s Almanac, and Christopher Mistal, research director at the publication.
“Since the VIX is designed to measure near-term market volatility the lower it goes the better the S&P 500 usually performs,” Hirsch and Mistal wrote in a research note to clients. “Thus, a VIX death cross can be a bullish indication.”
Since 1990, there have been 35 death crosses for the VIX prior to the current one, according to the Stock Trader’s Almanac. On average, the S&P 500 has climbed 0.5% and 0.6% respectively one and two weeks following the formation.
With all that being said, equity traders are only confident in one thing over the next week: more turbulence.
Volatility has eased significantly, with the VIX falling below 20 at the beginning of this month after spiking as high as 34.53 intraday on Oct. 12. On Monday, however, it rose above 24 as investors brace for an important measure of consumer inflation on Tuesday, followed by the Fed’s rate decision a day later. Those key events will likely shape what’s ahead for a beaten-down stock market in 2023.
“This would suggest that the current VIX death cross is likely bullish in the near-term, but not a great indication much beyond two weeks,” Hirsch and Mistal wrote.
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