By CCN Markets: The Dow Jones chalked up its best performance in months yesterday after Donald Trump delayed additional tariffs on China until December. But the stock market party was short-lived, and the futures market points to a weak open on Wall Street on Wednesday.
If you’re looking for reasons why the markets have lost their excitement this morning, look no further than the VIX, also known as the ‘fear index.’ Speaking to CNBC, VIX expert Mark Sebastian said the fear gauge is doing something it shouldn’t be doing. And that’s a flashing red light.
Dow futures in triple-digit fall
At 5.28 am ET, Dow Jones Industrial Average futures plunged 134 points lower to 26,180. The 0.5 percent fall points to a weak market open, despite yesterday’s relief rally.
It follows a weak session in Europe which saw Germany’s DAX fall almost 1 percent and the UK’s FTSE 100 drop 0.4 percent.
Fear index: a glimpse into stock market sentiment
The VIX, or CBOE Volatility Index, typically has an inverse correlation to the stock market. It goes up when traders are nervous and uncertain. In practice, the VIX moves lower when the Dow or S&P 500 goes higher.
But even despite yesterday stock market jump, the VIX remains above 16, a mark that generally determines caution in the markets. If traders were genuinely bullish on the stock market, the VIX should have fallen further.
As CNBC’s Jim Cramer explained:
“Every time the S&P’s had a rapid rally that failed to really bring down the VIX ... it resulted in some sort of sell-off … The most notable one being the big blowup in January of 2018.”
Expect a Dow Jones pullback?
If Mark and Cramer’s analysis is right, there could be more choppiness in the markets ahead. After consolidating, it may then push higher again.
“[Sebastian Mark] says the market needs to pull back a bit for a couple of days, then hopefully we get a slower, more logical rally.”