It’s a rare occurrence.
But when it happens, it can be a warning sign.
The infamous fear gauge – the VIX – has again fallen to an unusual low of less than 10 – currently sitting at 9.75. The last few times its dipped under that threshold, it took off not long after on a massive market pullback.
Historically, each time the VIX fell under 10, markets have fallen not long after.
After reaching a low of 9.31 in 1994, the Dow Jones Industrials slipped from a high of 4,000 to less than 3,550. After reaching a low of 9.64 in December 2006, the Dow Jones fell from 11,013 to 10,661. Each was a rarity. But when it happens, we need to be cautious in how and what we trade.
By the time the VIX hit a low of 9.56 on May 9, 2017, we knew it was only a matter of time before history repeated itself. And then it happened. Fear exploded. The VIX popped to a high of 15.71. The Dow Jones Industrials plummeted 370 points.
Again, a read of less than 10 on the VIX can be a warning sign of things to come.
However, once the panic does hit, we can usually tell with up to 80% accuracy when calm may resume. Look at what has happened historically when the VIX challenges its upper Bollinger Band with overbought reads on RSI, MACD and Williams’ %R. The VIX pivots and turns lower not long after.
In fact, that’s what happened mid-May 2017, allowing some traders to trade the recovery, as many others panicked.