The stock market has been on a tear since Donald Trump won the presidential election, with the index averages surging to record high after record high, Jim Cramer said during his Mad Money program's "Off the Charts" segment. But how long can the post-election rally last? When is it time to start worrying?
To get a handle on that, Cramer turned for insight to Mark Sebastian, founder of OptionPit.com and a colleague at RealMoney.com. One of Mark's specialties is gauging the relationship between the averages and the CBOE Volatility Index, or VIX for short. The VIX measures the level of volatility that traders are expecting in the near future and is often used as a proxy for just how afraid we are. It's especially helpful in times of euphoria, like we have now, because it helps take emotion out of our assessment of the market.
First, Sebastian looked at these paired charts, below, of the S&P 500 and the VIX over the last three months. According to Cramer, Sebastian pointed out that from the end of September through right before the election, the S&P 500 was very choppy, and during this period the VIX steadily moved higher, which is about what you'd expect.
Then, after Trump's surprise victory, the S&P 500 roared higher and the VIX cratered, which is normal. Sebastian points out thought that, over the last few days, the VIX has continued to fall as the market averages have climbed still higher. He said that's a clear sign that investors believe in this rally and could be far from finished.