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The "Calm Before the Craziness"

The pickup in stock market volatility was wholly predictable -- here's why

by Bob Stokes
Updated: December 05, 2019

An investor should never get complacent with the stock market, even during stretches of low volatility. In fact, especially during stretches of low volatility.

Let's go back to Nov. 15 -- not long before the recent spike in the VIX, the "fear index" -- when CNBC noted:

Wall Street is getting very bullish as stocks hit records.

Yes, the stock market continued to climb. On Nov. 27, the DJIA hit an intraday high of 28,175.

Yet, EWI urged caution. After the close that day, our U.S. Short Term Update showed this chart and said:

The Calm Before the Craziness

Today, the CBOE Volatility Index (VIX) closed below 12.00 for the third straight session. ... In fact, investors are so complacent that, paradoxically, it signals a coming pick up in volatility. The chart shows the 20-day volatility of the MSCI USA Minimum Volatility Index and 20-day volatility of the S&P 500. The Minimum Volatility Index is designed to reflect the performance of a minimum variance strategy, i.e., very low volatility. The bottom graph shows the spread between the two volatilities. The 20-day volatility in the S&P 500 is less than the 20-day volatility for the Minimum Volatility index. A number of sentiment and momentum indicators are currently compatible with a very late-stage rally.

This warning was timely.

Our Dec. 2 Short Term Update noted:

Since rising to 28,174.90 last Wednesday, November 27, the DJIA has dropped 382 points in two days. ... Today, the CBOE Volatility Index (VIX) surged 21% intraday, to a high at 15.27. On a closing basis, it was the largest single day percentage rise in over three months.

So, yes, not only had some "craziness" returned, but the market got even wackier the very next day as the DJIA closed down 280 points. As you may know, the index had fallen more than 450 points intraday.

Investors are now wondering if a Santa Claus rally is in peril.

Yet, there's no reason to wonder what our analysts are now telling subscribers.

Learn what our Elliott wave experts expect next for stocks via a risk-free trial. Look below to get started.

Are You Expecting a "Normal" Pullback in the Stock Market?

If the answer is "yes," -- beware.

In EWI's view, this is an unsound strategy. Why?

Well, there is no such thing as "normal" in the stock market -- only patterns that unfold as part of a fascinating fractal.

EWI's job is to analyze the fractal patterns, and provide you with our best conclusions.

Learn exactly what EWI's analysts are telling subscribers about what they anticipate next for stocks.