Jim Cramer says ‘fear gauge’ induced a buying opportunity in stocks

by Buzz Street Times

CNBC’s Jim Cramer advised investors Monday to stay the course after the stock market rebounded one session after suffering back-to-back weekly losses.

The S&P 500, facing pressure from inflation anxiety, declined 3% during the two-week stretch, but the “Mad Money” host took a cue from the volatility index — also known as the VIX or fear gauge — in an effort to plot which direction stocks may go next.

“Don’t let last week’s inflation scare freak you out,” he said. “The charts, according to Mark [Sebastian], suggest that the panic’s over and the market is beginning to roar.”

Cramer reviewed chart analysis by Sebastian, a technician who launched the trading education firm OptionPit.com and contributes to RealMoney.com, in the CBOE Volatility Index.

According to Sebastian’s research, Monday’s reversal reflects the aftermath of similar spikes observed in the VIX in June, November and January. In the weeks after those spikes, the VIX fell double digits and the S&P 500 rallied higher.

Had the VIX continued to rise alongside the S&P 500 Monday, caution would be warranted, Cramer added, because that’s usually a bearish sign.

“A VIX spike is what happens when the fear gauge makes a hard move up out of nowhere and then gives it away almost as fast. It represents a moment of panic that you’ve got to buy, because it quickly subsides,” Cramer said. “That’s why Sebastian’s confident that a VIX spike needs to be treated as a buying opportunity.”

The volatility and benchmark indexes usually trade in opposite directions — when the S&P 500 rises, the VIX would ideally fall and vice versa. As stocks sold off last week, the fear gauge rallied nearly 27%, its biggest surge in about a month, to just below 28.

If VIX spikes in recent memory are any indication, the S&P 500 could be on its way to new highs, Cramer said. The VIX on Monday declined about 16% as the S&P 500 advanced 2.38% to close above 3,100.

A VIX swell, as opposed to a VIX spike, is when the index rises for multiple weeks alongside the market, a sign that a potential sell-off is in the works, he added.

“Whenever you see them going in the same way, it means the market’s about to course-correct. In a VIX swell, the stock market eventually peaks, which sends the volatility index spiking still higher,” he said. “If you want stocks to go higher, then a VIX spike [is] great news.”

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