Published On: Tue, Oct 14th, 2014

Stock Market Fear Index Saying ‘Be Very Afraid’

Be Very Afraid

On CNBC’s Mad Money, Jim Cramer brought out the chart of the VIX, the stock market’s Volatility Index, popularly known as the “Fear Index.” While Cramer usually focuses on fundamentals of companies, he devotes a weekly segment to consulting technical analysis and looking at charts. Analyst Mark Sebastian notes that the VIX is not necessarily a scary thing. Often it predicts short-term dips in stocks followed by enthusiastic rallies. He demonstrated several patterns of the VIX surpassing the 20 mark, with temporary decline in the S&P 500 followed by bullish patterns.

However, this time is different. The VIX and the S&P 500 should be moving in opposite directions, meaning, that as stocks rise, volatility declines and the reverse. This time, the VIX was rising over the summer along with the S&P 500, signaling that investors didn’t feel so confident in the rally in stocks. The S&P 500 crossed the 100 day moving average, with the VIX crossing the 20 mark, which should have signaled a bottom in stock declines, but Sebastian thinks the S&P 500 could fall further and the VIX can rise higher. While the result is not likely to be long-term carnage, Sebastian sees at least a 2.8% decrease in stocks. With Ebola, Isis, sanctions against Russia and other disasters, investor confidence seems to be the main casualty.

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