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The bear market will bottom on June 1. I write this with tongue partially in cheek, of course. No one can confidently predict the exact day anything will happen in the market.
Nevertheless, with sensible assumptions based on the VIX’s recent trading behavior, we can make a reasonable estimate that the bear market only has a couple of more months to live.
The VIX, of course, is the CBOE’s Volatility Index. It hit what so far is its peak for this bear market at 85.47 on March 18, and has declined markedly since then — even as the market itself has continued to fall. It closed Monday of this week 28% below that high. That’s enough lower to at least speculate that the March 18 high will turn out to be the high for the current cycle. And that’s crucial information, since historically the VIX peaks out before the market bottoms.
How much before? Based on bear markets since the VIX was created in the mid-1980s, the average lead time is 75 days. Add that number of days to March 18 and you arrive at the first day of June.
Why does the VIX peak before the market bottoms? No one knows for sure, of course. But the general explanation among the analysts I’ve read is that, as Morgan Stanley put it, “after a shock, markets first become comfortable with the level of uncertainty (volatility), thenwith the level of price” — and only then does the market bottom.
A good illustration of this phenomenon came during the Great Financial Crisis. As the historians among you will remember, the VIX hit its high during that crisis in November of 2008, and the market itself didn’t finally bottom until the subsequent March.
In that case, of course, the VIX hit its peak 3½ months prior to the bear market bottom. The longest lead time came in the 2015-2016 bear market, when the VIX peaked nearly six months in advance of the eventual bottom. But the average lead time in all bear markets since the 1980s was 75 days. (I omitted from this calculation the 1987 crash, when the VIX hit its peak on the day of the crash itself, which also turned out to be the bottom of that bear market.)
