Charts suggest that the S&P 500 may struggle through early February

CNBC’s Jim Cramer said on Friday that technical analysis of Wall Street’s so-called fear meter indicates that the S&P 500 is facing challenging prospects in the short term.

“The figures, as interpreted by Mark Sebastian, suggest that the S&P 500 may remain in the house of pain through early February,” said the “Mad Money” host.

However, Cramer said that if the founder of̵[ads1]7;s forecast turns out to be correct, “you have to stick your nose in and use this weakness to buy the shares of quality companies that make real products or provide real services and generate real profits.”

Sebastian’s outlook is rooted in his analysis of the CBOE Volatility Index, which measures the implied volatility of S&P 500 options. VIX stands at almost 29 on Friday, a significant increase from where it was just over a week ago, when it was traded in the 17th century.

A chart showing the rally in VIX (bottom) and the decline of the S&P 500 (top).

Mad Money with Jim Cramer

“It has raged relentlessly for the past three weeks,” said Cramer, who according to Sebastian “is bad news for the stock market.”

“When it rises like this, it means that traders have bought protection for themselves every time VIX tries to withdraw,” Cramer explained. “Even on days when the market manages to grow, they do not move to loosen these hedges, they buy more insurance.”

Sebastian believes VIX futures also paint a disturbing story, Cramer said. They have begun to move into a state of backwardness, Cramer said. “In other words, the current volatility index is trading at a premium to February VIX futures, and February futures are starting to move above March futures,” he said.

VIX futures look ahead to 2022.

Mad Money with Jim Cramer

This rare development happened last in March 2020, during the sale of the Covid pandemic, Cramer said. It also happened in October 2018, when Wall Street was rattled by the Federal Reserve action.

“In short, almost every time the market sells dramatically, Sebastian says that VIX futures tend to go back about a third of the way through the devastation. Then sales continue for a few more weeks,” Cramer said.

“Unfortunately, this is where he thinks we are right now, because we are not dealing with a VIX spike, we are dealing with a VIX swell, and they always last longer than you want,” Cramer added.

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