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Charts show S&P 500 may struggle in early February

CNBC’s Jim Cramer said on Friday that technical analysis on the so-called Wall Street Fear Indicator indicates that the S&P 500 is facing a challenging near-term outlook.

“Charts interpreted by Mark Sebastian suggest the S&P 500 may remain in the house of pain until early February,” the Mad Money host said.

However, Kramer said that if the OptionPit.com founder’s prediction turns out to be correct, “you need to hold your nose and exploit this weakness to buy stocks of quality companies that make real products or provide real services and make real profits.”

Sebastian’s forecast is based on his analysis of the CBOE Volatility Index, which measures the implied volatility of S&P 500 options. The VIX is close to 29 on Friday, well up from a week ago when it traded at 17.

“They have been rising steadily over the past three weeks,” Cramer said, which Sebastian said is “bad news for the stock market.”

“When it rises this way, it means that traders have bought themselves protection every time the VIX tries to pull back,” Cramer explained. “Even on days when the market manages to rise, they don’t take any action to spin these hedges, they buy more insurance.”

According to Kramer, Sebastian believes that VIX futures also paint a worrying picture. According to Kramer, they began to move into a state of backwardness. “In other words, the current volatility index is trading at a premium to the February VIX futures, and the February futures are starting to move higher than the March futures,” he said.

Futures on VIX with a forecast for 2022.

Mad Money with Jim Kramer

Kramer said the rare event last happened in March 2020, during a sell-off due to the Covid pandemic. This also happened in October 2018 when Wall Street was shocked by the actions of the Federal Reserve.

“In short, almost every time the market drops sharply, Sebastian says that VIX futures tend to go into backwardation about a third of the way after the rout. 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 rise, and they always last longer than we would like,” Cramer added.

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