FX Evolution: Stock Markets Do This Before the Sell-Off Is Over

Markets tend to rise over time. But they often face pullbacks along the way. Many market pullbacks occur at seasonal periods. There’s usually one in the spring, then one in late summer.

This year, we had a modest pullback in late April. And the past two weeks have seen markets start to pull back. But there is one key sign that will need to trigger before the selloff reaches its peak.

The sign? It relates to the market volatility index, or VIX.

Over the past several years, when markets get fearful, the VIX rises from its usual level in the teens to 20. Once it hits that level, market fear tends to be near a peak.

In a bigger crisis, the VIX may rise even further. But for garden-variety market pullbacks, 20 is a reasonable sign.

The market pullback of the past few weeks has pushed the VIX to the 16 level. That’s still within the market’s average range. Until the VIX tops 20, it’s likely that investors will see some further weakness in the market ahead.

Once the VIX does top 20, investors can start buying into beaten-down stocks ahead of a likely relief rally. That would likely most benefit tech stocks, which tend to sell off the most in a market pullback.

A VIX over 20 also means traders can buy call options cheaply, and stack the odds of big returns in their favor.

To watch the full analysis, click here.