Click Here To Learn When The Markets Are Going To Bottom

A classic sign of a turnaround in the markets is when the VIX — inverse index to the broad market S&P 500 Index — climbs over 40.

For the uninitiated, short-term options on the S&P 500 are used to calculate the VIX. The higher the option prices on the index, which raises the implied volatilities and the VIX, the more uncertain the market is.

The VIX is frequently referred to as the "Fear Gauge" due to this. The VIX essentially represents the market's forecast of volatility for the upcoming 30 trading days.

“Look for a 40 handle [on the VIX],” Wells Fargo Securities Equity Analyst Christopher Harvey wrote in a recent note. “A VIX > 40 has historically coincided with SPX -4% (average 1-day) and helped trigger the ‘Powell put.’ In other words, the environment needs to get worse before a monetary-policy pivot marks a longer-term buyable equity bottom.”

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The Powell Put: When the VIX index reached 40, according to the indicator's 20-year history, the Federal Reserve was either about to start reducing interest rates or had already started doing so.

Stocks typically benefit from loose monetary policy because low-interest rates make them appear more appealing than bonds or money market accounts. In recognition of the current Federal Reserve Chair Jerome Powell, some refer to this as the Powell put.

Although the U.S. central bank doesn't formally take stock prices into account when setting interest rates, history demonstrates a strange correlation between VIX surges and Fed activity.

When the VIX crossed 40 (for instance, in September 2001, July 2002, September 2008, February 2020 and October 2020), the Fed was either starting or already in an easing cycle.

In terms of recent times, the VIX hasn't reached a level above 40 since October 2020, which was more than a year before the current decline in the S&P 500 started.

According to economists, this suggests markets have not yet reached a discernible bottom because the VIX has not reached a level of 40.

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