I completely understand if you’re wondering how I can come across so confident with my labeling recent spikes in stock prices, today’s included, “bear market rallies”. Suggesting that the worst is yet to come.


Well, of course I’ve been pounding you with the macro, which — despite what you’re hearing from many on Wall Street — screams tough times ahead, record stimulus notwithstanding. But then there’s human nature, with all its fears, hopes and biases, and the way it tends to push markets around under various circumstances.


For example, here’s a graph of the VIX Index (white), nicknamed the “Fear Index”, which tracks implied volatility in S&P 500 options contracts, along with the S&P 500 itself (yellow); capturing the first big spike in the VIX of the 2008 bear market:





And here’s the same for the current bear market:

Yeah, WOW! 


Even more wow is the fact that stocks were down ~25% at precisely this (vix/s&p) point in ’08, just like today…


So, bear-market human nature: 


Humans panic on the realization that recession looms, the VIX spikes and stocks fall. Then, shortly thereafter, the Pavlovian buy-the-dip response of the previous bull market takes over on any shred of good news, the VIX falls and stocks rise. 


Thing is, recessions simply don’t work themselves out that quickly…


Here’s the rest of the 2008 experience:





Yep, the vix calmed down, but settled within a 40 to 60 range (that’s high), while the S&P 500 fell another 32% (-57% peak to trough).


Now, the above stated, make no mistake, while the history is compelling, it doesn’t have to repeat. Thus, we continue to crunch the data and measure the trends, day in and day out, and remain open to all possibilities.