Stock Market’s 'Fear Gauge’ Move is Historically Bullish for the S&P 500

Investors have been snapping up stocks in the final hour of trading over the past two weeks, coinciding with a sharp decline in a key measure of anticipated market volatility. Analysts believe these developments indicate a favorable outlook for equities in the months ahead.

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Dean Christians, senior research analyst at SentimenTrader, highlighted this trend in a recent note, pointing to historical patterns that suggest these signals bode well for the stock market's performance.

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The Role of the VIX in Market Sentiment

The Cboe Volatility Index, commonly referred to as the VIX or Wall Street’s “fear gauge,” measures expected volatility for the S&P 500 over the next 30 days. On Friday, the VIX closed below 14, a four-month low and the first time it had dipped below that level since early August. Back then, a brief but intense market pullback had pushed the index above 20.

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In August, the VIX surged to an intraday high of over 65 before stabilizing, trading between 14 and 23 throughout the late summer and early fall. Key events, including the presidential election, kept market uncertainty elevated. Now that the election has concluded, the VIX has sharply declined.

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Christians noted that the last time the VIX dropped below 14 after climbing above 20, in the fall of 2023, the S&P 500 posted a 10% gain over the following three months. Historically, when the VIX cycles above 20 and then retreats below 14, stocks have delivered strong and consistent returns over both medium- and long-term timeframes.

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SentimenTrader’s research examined 26 past instances of the VIX falling below 14 after rising above 20. In all but one case—2015—the S&P 500 was higher a year later. The median gain during these periods was 14.2%.

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This pattern has encouraged optimism among analysts, who see the declining VIX as a signal of calming market conditions and improved investor sentiment.

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Another positive signal comes from SentimenTrader’s last-hour indicator, which tracks cumulative buying activity in the final hour of trading for the S&P 500. Over the last 10 sessions, this indicator has registered gains in nine instances. Christians interpreted this as evidence of traders rushing to complete buy orders amid expectations of continued upward market momentum.

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Historically, when this indicator has shown such strong activity and the S&P 500 is within 2% of its all-time high, the index has risen 90% of the time over the following six months. While the three-month outlook is slightly less robust, with gains occurring 81% of the time, the S&P 500 has notched 14 consecutive gains in such scenarios since 1995.

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The signals from the VIX and the last-hour buying pattern echo market movements following Donald Trump’s 2016 election victory. At that time, stocks surged into December before pausing for several weeks, eventually resuming their upward trajectory.

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Similarly, the S&P 500 ended last Friday at a record high, logging a 5.7% gain for November—its best monthly performance of 2024. Year-to-date, the S&P 500 has climbed nearly 27%, with additional gains anticipated in the near term.

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Christians noted that the combination of declining volatility and robust last-hour buying points to a “constructive environment for stocks.” He emphasized that these signals align with patterns observed during the 2016 election, suggesting that the current market setup remains favorable for bullish investors despite potential short-term fluctuations.

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The analyst concluded by saying, “The weight of the evidence continues to favor the bulls, notwithstanding the typical gyrations associated with uptrends.”

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With the VIX at a multi-month low and traders demonstrating strong buying interest late in the trading sessions, the outlook for equities appears bright. Historical patterns suggest that these signals often precede sustained market gains, providing a constructive backdrop for investors heading into the end of the year.

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While short-term volatility is always a possibility, the alignment of multiple indicators supports a positive medium- to long-term outlook for the stock market, reinforcing confidence among market participants.

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