What the VIX Move Means for the S&P 500

Stocks Signal Promising Returns as Volatility Falls and Late-Day Buying Surges: SentimenTrader

Traders have been snapping up stocks during the final hour of trading over the past two weeks, coinciding with a sharp decline in the Cboe Volatility Index (VIX). These developments suggest favorable conditions for the stock market in the months ahead, according to Dean Christians, senior research analyst at SentimenTrader, in a recent note.

The VIX Drops Below Key Levels

The VIX, often called Wall Street’s “fear gauge,” tracks expected 30-day volatility for the S&P 500. On Friday, it closed below 14 for the first time in four months, following a retreat from summer highs above 20 during a market pullback. Historically, when the VIX falls below 14 after surging past 20, the S&P 500 has delivered strong medium- and long-term returns.

According to SentimenTrader’s analysis of 26 similar past instances, the S&P 500 has risen a year later in 96% of cases, with a median gain of 14.2%. The sole exception was in 2015. Following comparable conditions in late 2023, the index rose 10% in three months.

Late-Day Buying Indicates Confidence

SentimenTrader’s last-hour trading indicator, which measures the cumulative direction of trading in the final hour, has surged in nine of the past 10 sessions. This pattern signals growing trader confidence and aligns with the “upward drift” often observed in rising markets.

Historically, when the S&P 500 is within 2% of its all-time high and the last-hour indicator rises in nine of 10 sessions, the index has gained 90% of the time over the following six months. Over three months, the success rate drops slightly to 81%, but the indicator has delivered 14 consecutive gains since 1995.

A Repeat of the 2016 Election Rally?

The current market dynamics echo those following the 2016 presidential election. After a similar VIX decline and late-hour buying surge, stocks rallied into December before consolidating and resuming their upward trend.

Strong Year for Stocks

The S&P 500 ended November with a 5.7% monthly gain, its best performance of 2024, and has climbed nearly 27% year-to-date. The index closed at a record high on Friday, positioning it for further gains.

Outlook Remains Bullish

Christians highlighted that the combination of a declining VIX and robust late-hour buying activity signals a “constructive environment for stocks.” Despite normal fluctuations during uptrends, he noted that the current evidence strongly supports continued bullish momentum.