While stocks were rallying during the beginning of the year, the Chicago Board Options Exchange Volatility Index (VIX) was range-bound, with the readings falling between 14 and 22 from mid-January all the way through mid-May.
The VIX is a measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices and is often referred to as the “fear index” or “fear guage.”
When the rally was happening in the first quarter, each time the VIX jumped above the 21 level, it was a good sign for a quick burst higher by the market.
Are we in that same kind of market now? Possibly.
The sentiment indicators were coming off extreme bearish readings last fall and were still shifting to bullish levels.
Looking at the Investors Intelligence bullish percentage, the low in June was almost identical to the low last fall. At present, the bullish percentage is approximately the same as it was in mid-November.
The eventual high in the bullish percentage came near the 55 percent level in early February.
The current level on the bullish reading is 43.6 percent, so there is still room for the indicator to move higher. If the pattern repeats itself, this means the current rally that started in June still has time and room to the upside.
The bearish percentage has remained at 24.5 percent for each of the past three weeks.
If the pattern in the VIX and the pattern in the Investors Intelligence report hold, the two-day selloff the market has experienced these last few days should be short-lived.
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