-
Wall Street's fear gauge has reversed course after a historic surge earlier this week.
-
The VIX hit its third-highest level ever on Monday due to a violent unwind of the yen carry trade.
-
The degree of the VIX's reversion since then shows the worst of the scare is over, says Fundstrat's Tom Lee.
The historic surge and subsequent decline of Wall Street's fear gauge suggests that the worst of the stock market's "growth scare" is over.
That's according to Fundstrat's Tom Lee, who said in a Wednesday note that the CBOE Volatility Index, better known as the VIX, is behaving like a bottom in the stock market is in.
The VIX made history on Monday when it soared a record 172% intraday to the 65.73 level, representing its third-highest level ever. The surge came amid a violent unwind of the yen carry trade, which knocked down risk assets across the globe.
The only time the VIX hit a higher level was at its 89.53 peak reached during the Great Financial Crisis in October 2008 and its 85.47 peak hit during the COVID-19 pandemic in March 2020.
But since hitting its third-highest level ever on Monday, the VIX has sharply declined, falling from 65.73 to 27.71 on Tuesday, representing a peak-to-trough decline of 58%. Still, it remains markedly above where it was trading prior to the market sell-off.
"VIX falling from 66 to 27 is a positive sign and further sign this is a 'growth scare' with the worst likely behind us," Lee said, adding that the normalizing VIX affirms that the stock market plunge over the past week is not a systematic crisis.
On a closing basis, the VIX closed down 28.2%, representing its second-sharpest daily decline on record, only being eclipsed by the 29.6% decline seen on May 10, 2010, which was the trading day after a flash crash sent the Dow Jones Industrial Average plunging about 9% in a matter of minutes.
Carson Group chief market strategist Ryan Detrick told Business Insider on Wednesday that when the VIX experiences such swift declines, the stock market tends to see some sizable gains going forward.
"The VIX closed down more than 10 points yesterday, which is very rare. This last happened after the Flash Crash in May '10, the US debt downgrade in August '11 and March 2020. All three of those times were quite bullish times for investors and a year later the S&P 500 was higher each time and up 37% on average," Detrick said.
Fundstrat's new note from Wednesday referenced commentary from last Friday suggesting stocks could bottom this week. At that point the VIX was up 65% over the course of three days. Note that it spiked another 65% on Monday as the S&P 500 saw its worst day in two years.