Charts suggest S&P 500 may struggle through early February

CNBC’s Jim Kramer said Friday that technical analysis of the so-called Wall Street fear gauge indicates that the S&P 500 is facing a tough near-term outlook.

“The charts, as interpreted by Mark Sebastian, indicate that the S&P 500 could remain in the house of pain until early February,” said the Mad Money host.

However, Kramer said that if the founder’s predictions hold true, “you need to stick your nose and use that weakness to buy shares of high-quality companies that make real products or provide real services and generate real profits.”

Sebastian’s view is rooted in his analysis of the CBOE Volatility Index, which measures the implied volatility of S&P 500 options. VIX stands at around 29 on Friday, significantly more than it was just a week ago, when it traded at 17 seconds.

Histogram showing the highs in the VIX (bottom) and lows in the S&P 500 (top).

Mad Money with Jim Cramer

“It’s been going up relentlessly for the past three weeks,” Kramer said, which, according to Sebastian, is “bad news for the stock market.”

“When it goes up like this, it means that traders are buying protection for themselves every time the VIX tries to pull back,” Kramer explained. “Even on days when the market can rebound, they don’t move to get rid of those hedges, they buy more insurance.”

Sebastian believes the future of VIX also paints a troubling story, Kramer said. Kramer said they’re starting to move into retardation. “In other words, the current volatility index is trading at a premium to the February futures, and the February futures are starting to move above the March futures,” he said.

VIX futures are looking to 2022.

Mad Money with Jim Cramer

Cramer said this rare development occurred as recently as March 2020, during the COVID pandemic sell-off. It also happened in October 2018, when Wall Street was shaken by the actions of the Federal Reserve.

“In short, almost every time the market sells heavily, Sebastian says VIX futures tend to lag about a third of the way through the devastation. Then the selling continues for a few more weeks,” Kramer said.

“Unfortunately, that’s where he thinks we’re at right now, because we’re not dealing with a VIX spike, we’re dealing with VIX hypertrophy, and these always last longer than you’d like,” Kramer added.

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