“Mad Money” host took a pointer from volatility expert Mark Sebastian, founder of OptionPit.com, who warns that the recent market surge is likely to be short-lived.
“The charts, as Mark Sebastian suggested, the big fear – a total collapse of the economy and the stock market – I think has been removed from the table,” said Cramer, “but that doesn’t mean we are ready to “Instead, he expects a turbulent market that could give you another head start as ugly economic data continues to pour in.” “
The CBOE volatility index, known as the VIX, has been trending lower since mid-March, dropping from its high above 82 to less than 46 at the close of Tuesday. During this same period, the S&P 500 has increased by almost 12%.
The VIX, which generally works in contrast to the S&P 500, is nicknamed the fear indicator and is used to predict market volatility, measuring risk against investor sentiment. Looking at the action in both indices last week, the S&P fell 5% and the VIX fell more than 10 points to fall 18%.
Cramer said that it is a telltale sign for Sebastian that the peak of volatility has been reached and that the fear has subsided.
“Most of the time when the VIX is moving in tandem with the S&P it is a sign that the trend may be about to reverse,” said the host. “So when they both drop at the same time, Sebastian thinks it’s usually a good buy signal. “
However, the S&P 500 jumped 7% in Monday’s session, followed by a slight drop to 2,658.85 on Tuesday. Despite the large rally, the fear gauge dropped by about 1 point on Monday and rose again on Tuesday, a sign that the rally is short-lived, said Cramer.
He said the VIX had never fallen below 43 during the session, even though the S&P 500 was up more than 3% at one point.
“Here’s the problem for Sebastian: It was a good sign when the VIX dived with the S&P 500 last week. This meant that the drop in stocks could be temporary, but at the same time, it’s worrisome when the market explodes higher and the VIX does almost nothing. “
The action reminds Sebastian, who is a risk management expert, of the volatile environment of 2008 when the VIX climbed above 80 months before the market bottomed out during the financial crisis.
The same, Sebastian suggests, could apply this time, said Cramer. The fear indicator peaked at around 83 in March this year. The fear has been removed from Wall Street, but the stocks are not ready for a “sustained rally,” the host said.
If 2008 is an indication, the market could face more turbulence until the summer, in part because of more negative economic information, said Cramer.
“But, and it’s a big one, but if VIX doesn’t skyrocket the next time the market turns, Sebastian recommends making a few purchases in weakness,” said Cramer. “In other words, there is no need to continue actions after this week’s rally. You can afford to be patient and buy the dips. “
“No need to feel FOMO here,” he said.