According to the VIX research of one renowned financial firm, the stock market has not yet experienced the capitulation that generally heralds the conclusion of a bear market.

By capitulation, I mean the deep despair that causes investors to throw in the towel and abandon equities.

Though not every bear market ends in capitulation, the vast majority do. As a result, Wall Street analysts are examining the past for dependable markers of capitulation.

The CBOE Volatility Index (VIX) indicates option traders’ expectations of S&P 500 volatility over the next month, with higher levels indicating higher projected volatility.

The highest-ever close for the VIX since 1990, the earliest year for which the CBOE has historical data, was 82.69, in March 2020. Its lowest-ever close was 9.14 in November 2017. It is currently in the low 20s.

According to a recent analysis by BNP Paribas equities strategists, the VIX is a credible signal of market surrender and thus useful for identifying whether the bear market has ended.

They discovered that the median VIX level during previous bear-market bottoms was 40.5, significantly above the current bear market’s greatest level (at least so far) (which is 36.45).

Furthermore, because the firm discovered that spikes in volatility “have on average occurred at the same time as the market’s trough,” they believe that the bear market has not yet reached its bottom.

The firm’s premise appears plausible, given that the VIX has doggedly refused to rise during this bear market, no matter how much turmoil the market has experienced.

Consider what happened on December 15, when the stock market dropped the most in three months, with the Dow Jones Industrial Average DJIA, dropping more than 750 points. The VIX closed the day at 22.83, up barely 1.69 points.

This closing level is in the 74th percentile of the VIX’s historical distribution since 1990, implying that 26% of daily closures in the previous 32 years were higher.

This strongly suggests that we have yet to witness capitulation.

However, investors should not rely too much on the VIX’s warning.

The median VIX level determined by BNP Paribas during previous bear market bottoms — 40.5 — conveys a deceptive precision because it is actually in the middle of a vast range.

Consider where the VIX stood at the bottom of the eight bear markets since 1990, according to the Ned Davis Research bull and bear market calendar.

It was between 28.14 and 61.59. In two of the eight, the VIX was lower than it had been in both the spring and October of 2022.

As a result, it appears to be a stretch to conclude firmly from the VIX that the bear market did not bottom at the market’s April or October lows.

The figure above, which shows the S&P 500’s subsequent 12-month return as a function of the VIX, exemplifies this large range.

Though the average return is connected with the VIX level, observe the spread between the stock market’s greatest and worst returns in the green columns.

Any wager based on the data in this chart would have to be a low-confidence bet.

Take a look at what transpired during the Global Financial Crisis. The VIX had never gone above the high 40s before the GFC.

As a result, when the VIX reached that level in October 2008, many of the market timers my firm monitors bet firmly that the bear market was nearing its end.

They were mistaken.

Stocks continued to fall. The VIX would peak near 90 in November 2008, and the bear market would last until March 2009, when the S&P 500 was roughly a third lower.

Consider that a jump in the VIX signifies that the bear market has reached its bottom.

I computed the number of days from the date the VIX peaked to the date the bear market ended for each bear market since 1990 in the Ned Davis Research calendar.

The average was 57 calendar days, which is about two months.

While the VIX peaked on the precise day of the bear market’s low in one case, 171 calendar days (almost six months) passed between the high and the finish in another.

Again, this is a wide range.

So, even if the VIX had recently climbed high enough to indicate capitulation, we couldn’t conclude that the bear market was over.

These views are not meant to be a criticism of the PNB Paribas study. Because there is no agreed-upon definition of capitulation, every attempt to quantify it is bound to be imprecise.

As a result, some analyses have concluded that capitulation has already occurred, while others, such as PNB Paribas’ research, have suggested that it has not.

The final line is that the image is muddled, which is not surprising.

It is impossible for all of the indicators to point in the same direction.

On the one hand, it is true that if the VIX had surged considerably higher in recent sessions, the weight of the evidence would point to the bear market nearing its end.

On the other hand, such a tilt would be negligible.

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