CNBC’s Jim Cramer advised investors on Monday to hold on after the stock market rebounded for a session after suffering weekly losses.
The S&P 500, under pressure from inflation fears, fell 3% during the two-week period, but the “Mad Money” host used the volatility index – also known as the VIX or fear measure – to determine which Direction for stocks can go next.
“Don’t let the inflation fears of last week freak you out,” he said. “The charts according to Mark [Sebastian], suggest the panic is over and the market starts roaring. “
Cramer reviewed the chart analysis of Sebastian, a technician who founded the trading training company OptionPit.com and contributes to RealMoney.com, on the CBOE Volatility Index.
According to Sebastian’s research, Monday’s reversal reflects the aftermath of similar spikes seen in the VIX in June, November, and January. In the weeks following these peaks, the VIX fell double digits and the S&P 500 gained.
If the VIX had continued to rise alongside the S&P 500 on Monday, caution would be advised, added Cramer, as this is usually a bearish sign.
“A VIX spike is what happens when the fear indicator takes a hard climb out of nowhere and then gives it away almost as quickly. It represents a moment of panic that you need to buy because it wears off quickly,” said Cramer . “So Sebastian is confident that a VIX spike must be treated as a buying opportunity.”
The volatility and benchmark indices usually trade in opposite directions – if the S&P 500 is rising, the VIX is ideally falling and vice versa. When stocks sold out last week, the fear indicator jumped nearly 27%, the biggest increase in about a month, to just below 28.
If VIX spikes in recent memory are any sign of this, the S&P 500 could be on its way to new highs, Cramer said. The VIX fell 16% on Monday as the S&P 500 rose 2.38% to close above 3,100.
A VIX spike as opposed to a VIX spike, when the index rises alongside the market for several weeks is a sign that a potential sell-off is in the works, he added.
“Anytime you see them happen the same way, it means the market is about to correct. If the VIX rises, the stock market will eventually peak, making the volatility index even higher,” he said. “If you want stocks to go up, then a VIX rise.” [is] Great news.”