an index called the vix was flashing a major warning signal right before the start of the great financial crisis this is the Market's expectation of future volatility and after having gone down steadily for multiple years in the early 2000s between February and July of 2007 this indicator began to move up from a historically low level of 10 tripling to reach 30 now a couple of months later in October of 2007 the stock market made its last all-time high before beginning a 60% decline during the Great Recession fast forward to today and we've seen something similar
this VIX Index has gone from steadily trending lower for the last few years hitting a low of around 12 and now just over the last couple of months we've seen the vix move considerably higher in a similar fashion to the way it did in early 2007 so first what on Earth is the vix the vix is an index that measures the price of options that are being placed on the market whether that's call or put options if Traders are betting big on options it means that they're expecting larger moves from stocks in the future or
what we can also label as volatility when this is the case the vix shows a higher reading now in most cases where the vix spikes that's usually accompanied by a drop in the stock market that's simply because when the market is going down it usually sees a larger moves and so options Traders are making bigger bets on the market that's reflected in a higher vix reading so when the vix started to R rise in early 2007 despite the stock market being at all-time highs it suggested that options Traders were betting that the market was likely
going to go down and they were eventually right but we can also fast forward to 2022 and see that they did the exact same thing between October of 2021 and January of 2022 the vix started to rise considerably despite the stock market being at alltime highs during this period eventually the S&P 500 turned around and began a 25% decline proving the options Traders correct once again so at a first glance it seems that when the vix is rising with the stock market at all-time highs it's not a particularly great sign for the stock market but
as always there's a catch large moves on the stock market don't always occur to the downside believe it or not you can also see the stock market make large moves to the upside so theoretically a rising vix can also mean that options Traders are expecting the Market to accelerate higher that's exactly what happened in 1995 after having made a low of about 10 in January of 1995 the vix began to Trend higher in a similar fashion to the way it did in 2007 2022 and 2024 now you can see this also happened with the stock
market at all-time highs in fact as the vix was Rising the stock market actually began to melt up higher this wasn't followed by a big crash like 2007 and 2022 the stock market continued melting up for another another five years in fact the moment where the vix started to rise was when the US Stock Market actually broke out of a very steady uptrend and began to accelerate higher so one thing is sure is that options Traders today are expecting larger moves from stocks but are these larger moves going to look like 1995 or are they
going to look like 2008 at a first glance we do have some similarities between today and 1995 for starters in both of these instances the Federal Reserve the US Central bank has been cutting interest rates and that often gets investors quite excited because when the Federal Reserve is cutting interest rates it means they are lowering the price to borrow money in an attempt to stimulate economic growth and so when investors see this they can get more excited about future economic growth this is a chart of the federal reserve's interest rate going back to 1990 this
is when they cut interest rates in 1995 and this is what's happening today now in both of these cases the Federal Reserve is cutting interest rates outside of an economic recession these gray bars you see here show us when all of the recessions occurred in the US over the last 35 years as classified by the NBR now in most cases the Federal Reserve is cutting interest rates during recession much like here in 2007 so that doesn't really do much to push the stock market higher in 1995 however they began to cut interest rates outside of
a recession which is what led to the Melt up in the stock market that occurred at that time we saw something very similar in 1984 where the Federal Reserve was also cutting interest rates outside of recession which also led to a kind of melt up in the stock market that eventually ended with the 1987 crash so this is exactly what they're doing today the Federal Reserve is cutting interest rates despite the fact that no recession has yet to materialize in the United States at least for now and that's where things start to get a little
bit more complicated because we do have signs that the US economy is starting to see some cracks and could be very close to completely breaking and that of course wouldn't be accompanied by a melt up in the stock market the number of states that currently have a rising unemployment rate is going up quite rapidly this is typically something that you see before or right at the beginning of economic recession for example we saw something similar in 2007 we have many more data points that are still pointing to a recession materializing by the end of 2024
and believe it or not we remain quite confident in that call however we absolutely cannot deny the strength of the stock market today so the rising volatility that we're seeing today has some elements of 1995 and some elements of 2007 and what we're saying to our clients right now is that as long as there's no recession this could be a sign that the market is accelerating higher right now in a similar way to what it did in 1995 but when the economy does begin to enter a recession we'll likely see the stock market get hit
very hard now in the short term if you've seen our last couple of videos we actually turned short-term bearish on the stock market right here we posted a video laying out our entire reasoning called the stock market is about to get Ruck pulled and we sent out sell alerts to our clients to book profit on a bunch of our trades at braavos research.com even initiating a couple of short trades on the market that are so far up very nicely the market has been correcting quite violently over the last couple of trading sessions and we're currently
closely watching for signs of a bottom to buy back into the market and add the setups that have been on our watch list you can have access to our entire trading strategy at braavos research.com we take you step by step through each trade from the initiation to the closure and you can check out all of our recent closed trades on the homepage of our website
