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Market bounces in 2023 have come when fear is high and end when it levels out, suggesting that Thursday’s violent surge could have some legs yet. The S & P 500 roared 5.5% higher following better-than-expected news on inflation that market participants took as a sign that the Federal Reserve may soon halt its aggressive interest rate hikes. But Nicholas Colas, co-founder of DataTrek Research, pointed out that the rally also came amid a falling level of market fear as gauged by the CBOE Volatility Index . Colas cautioned against euphoria after major averages posted their biggest single-day gains since 2020. “It is great to see US stocks up +5 percent in a day, but let’s keep this move in perspective and not get overly optimistic just yet,” Colas wrote in his daily market note Thursday evening. “Our standing advice is the same: keep watching the CBOE VIX Index.” The VIX closed Thursday at 23.5, just above its long-run average of 20 after peaking near 34 in early October. If the gauge holds around that level, it could give the market some breathing room yet. “The history of every rally this year is that they start with the VIX between 33 – 36 (near/at 2 standard deviations from the mean) and end when they get to 19-20,” Colas wrote. “By this measure, the current rally has some room to run. Being up +5 percent [Thursday] doesn’t tell us that; the VIX as a measure of investor uncertainty does.”
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