Jeremy Wilkinson-Smith passes along a chart he says is getting some play today, one that suggests the stock market sell-off may be just about over.
The VIX curve has gone into backwardation today, as the bottom panel in the chart shows. In other words, VIX futures three months out have become less expensive than current-month VIX futures, meaning it costs more to hedge against a market downturn today than it does three months from now.
This inversion of the term structure in the forward VIX curve is indicative of elevated market stress, and on the occasions when we’ve seen such an event in the past few years, the S&P 500 has bottomed and headed higher.
Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus, calls this “the most important chart in the world.”
“I’ve used this before to show ‘exhaustion’ of stress, and it was a sharp buying signal four times in 2013,” says Lutz.
“We did get the signal on January 24, and proceeded to slide another 2% before bottoming and starting the recent leg to fresh highs.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.