This Dot-Com Parallel May Signal When Stock-Market Mania Is Ending

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I’m sure some sell-side volatility analyst has used this corny turn of phrase before, but the only thing investors have to fear right now is lack of fear itself.

 VIX has been trading above 20 for 245 days, according to data compiled by Schwab chief strategist Liz Ann Sonders. It’s the second-longest stretch in history. The longest was in the aftermath of the 2008 financial crisis. But there’s a key difference between now and then: our current VIX is elevated despite making new highs basically every day since November, as opposed to in 2009, when the market had bottomed, but few knew it to be the case, and stocks were still 20-40% off pre-crisis highs.

 Our current situation is actually more like the dot-com period, in which VIX technically didn’t string together as many days above 20 as right now, but was regularly above the level as stocks were printing records. Somehow not surprising, right? It makes sense.

 While some colloquially refer to the VIX as the “fear gauge,” it’s not a great description, as it projects a sentiment judgment on investor activity that is not under the purview of the VIX, which measures implied volatility for the S&P 500 over the next 30 days. Volatility cuts both ways, and right now, the volatility is upward, as extremely bullish sentiment levels are driving an enormous amount of call-buying activity that is helping to keep VIX elevated.

 When the VIX surged at the height of the pandemic, sure, it may have been appropriate to consider it the Fear Gauge. Today, it’s more like the “lack of fear” gauge. For a market running on red-hot enthusiasm fueled by call buying, investors may want to be attuned to when the VIX actually does break its current floor of 20 as a sign that extreme speculation is fading and thus, this fervent rally slowing.

 It may seem counterintuitive, but it’s what happened at the peak of dot-com: after a brief correction from the all-time high, the VIX jumped to 35. Then stocks rebounded and the gauge plunged to 16.5, the lowest in two years. That was the second half of the double-top that would mark the end of the mania.

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 Everyone knows the stock market is in a speculative frenzy at the moment. The problem with being bearish is that it’s impossible to know when the music will stop. The simplest approach is to let the charts tell you when the technical trend reverses. If this time around is anything like the internet bubble, and it sure feels that way in many respects, VIX may be an even earlier tell.