The “Mad Money” host took a pointer from volatility skilled Mark Sebastian, founding father of OptionPit.com, who cautions that the current upside out there is probably going ephemeral.
“The charts, as suggested by Mark Sebastian, the big fear — a total collapse of the economy and the stock market — I think has been taken off the table,” Cramer stated, “but that doesn’t mean we’re ready to roar. Instead, he’s expecting a choppy market that may give you another leg down as the ugly economic data keeps rolling in.”
The CBOE volatility index, often known as the VIX, has been trending downward since mid-March, coming from its peak above 82 to underneath 46 at Tuesday’s shut. In that very same time interval, the S&P 500 has risen almost 12%.
The VIX, which generally runs inverse to the S&P 500, is dubbed the concern gauge and is used to forecast market volatility, measuring danger towards investor sentiment. Looking at motion in each indexes final week, the S&P dropped 5% and the VIX declined greater than 10 factors for an 18% lower.
Cramer stated that could be a telltale signal for Sebastian that peak volatility has been reached and concern is easing.
“Most of the time, when the VIX moves in a tandem with the S&P, it’s a sign that the trend could be about to reverse itself,” the host stated. “So when they’re both going down at the same time, Sebastian thinks that’s usually a great buy signal.”
Yet, the S&P 500 surged 7% in Monday’s session, adopted by a light dip to 2,658.85 on Tuesday. Despite that huge rally, the concern gauge fell simply roughly 1 level on Monday and ticked up once more Tuesday, an indication that the rally is fleeting, Cramer stated.
He identified that the VIX by no means fell under 43 through the session, even because the S&P 500 was up greater than 3% at one level.
“Here’s the problem for Sebastian: It was a good sign when the VIX nosedived along with the S&P 500 last week. It meant the decline in stocks might be temporary, but by the same token, it’s worrisome when the market explodes higher and the VIX does next to nothing.”
The motion reminds Sebastian, who’s a danger administration skilled, of the unstable surroundings of 2008 when the VIX climbed above 80 months earlier than the market bottomed through the monetary disaster.
The identical, Sebastian suggests, might apply this time round, Cramer stated. The concern gauge peaked close to 83 in March of this yr. The concern has been taken out of Wall Street, however shares aren’t able to put in a “sustained rally,” the host stated.
If 2008 is any indication, the market might undergo extra turbulence till summer season, partially due to extra unfavorable financial info, Cramer stated.
“But, and this is a big but, if VIX doesn’t spike the next time the market rolls over, Sebastian recommends doing some buying into weakness,” Cramer stated. “In other words, there’s no need to chase stocks after this week’s rally. You can afford to be patient and buy the dips.”
“No need to feel any FOMO here,” he stated.