This move by the stock market’s ‘fear gauge’ is historically bullish for the S&P 500

Traders have been rushing in to buy stocks in the final hour of trading over the past two weeks, while a gauge of expected S&P 500 volatility has dropped sharply in the wake of the presidential election.

History says those developments tend to bode well for the stock market in coming months, according to Dean Christians, senior research analyst at SentimenTrader, in a Monday note.

The Cboe Volatility Index VIX, often referred to as Wall Street’s “fear gauge,” measures expected S&P 500 SPX volatility over the coming 30-day period. The VIX ended Friday at a four-month blow, finishing below 14. Christians noted that was its first close below 14 since the index surged above 20 in early August, amid a brief but violent stock-market pullback.

The VIX scored an intraday high of above 65 on Aug. 5, subsequently pulling back as markets calmed to trade in a range between 14 and 23 from summer into fall. Market-moving events, such as the election, helped keep it elevated. Now, with the election in the rearview mirror, the VIX has slumped.

The last time the VIX dropped back below 14 after a push above 20, in the fall of 2023, the S&P 500 went on to score a 10% gain over the next three months, Christians said. And history shows that when the VIX has cycled above 20 and then dropped back below 14, “stocks have scored excellent returns and consistency over the medium- and long-term horizons,” he wrote.

As shown in the chart and table above, SentimenTrader found that in the 26 past instances of the VIX returning back below 14 after a push above 20, the S&P 500 has been higher a year later with only one exception in 2015. The median gain has been a rise of 14.2%.

Meanwhile, SentimenTrader’s last-hour indicator, which tracks the cumulative direction of the final hour of trading for the S&P 500, posted gains in nine of the last 10 sessions, Christians said — signaling traders rushing to complete buy orders amid wariness over the “upward drift” that often characterizes rising markets.