Stocks fell in the fall of 2015 and at the beginning of 2016. In both cases, the short-term downside was 10%-plus. Those were the first 10%-plus declines in stocks since 2011. Investors had gotten used to consistent gains and easy money in the previous four years. But stocks showed a crack in their armor, and that caused a major spike in fear. How do we define fear? It’s more challenging than you think – you’re trying to put a number on a human emotion. We look at it in a variety of different ways, but the most common way to size up fear in the markets is through the Chicago Board Options Exchange Volatility Index (the “VIX”) – often referred to as the market’s “fear gauge.” When stock prices move wildly, the VIX goes up. When stock prices aren’t volatile, the VIX moves down. The VIX spiked during both recent falls. Generally, a VIX reading of more than 20 shows fear in the market. In late-2015, the VIX rose
fallen dramatically in the wake of the Asian Crisis, and we hit a fear extreme. Then, stocks surprised everyone and soared higher – the Nasdaq Composite Index rose 200% in 18 months during the dot-com bubble. (See chart to left.) I can’t guarantee a massive move like that again, of course. But I do believe that the coming years could resemble the late 1990s. We could be in the very late innings of a great bull market... And the fastest gains happen in the final innings. Why am I so confident? There’s one major reason. To put it simply... Stocks are
doing the same thing today that they did back then. Stocks fell dramatically late into that bull market... And then they soared dramatically, to new all-time highs. And that’s happening again today. Let’s take a closer look at these Melt Up setup conditions this time around... STOCKS HIT A FEAR EXTREME... THEN RISE DRAMATICALLY First, we’ve had two recent falls in stocks. And both led to major extremes in fear. You can see both clearly by looking at the chart below of the S&P 500...
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