Between last Friday and this past Monday, August 5, stocks nosedived on the back of July’s weak jobs report. The unexpectedly high unemployment number rekindled fears that the Federal Reserve has held rates too high for too long, inadvertently ushering the U.S. into a recession. Investors got spooked and began selling hand over fist, sending stocks plummeting. 

But as it turns out, the best time to buy stocks is when nasty Wall Street selloffs become powerful rebounds. And we may be facing one of those opportunistic transitions right now. 

One major indicator that supports this theory – the Volatility Index (VIX).

VIX: Time to Buy?

The VIX is widely considered Wall Street’s “fear gauge.” It represents the market’s expected volatility for the next 30 days, based on options activity. 

When the VIX is high, traders are fearful and expect a ton of uncertainty ahead. When it’s low, traders are calm and anticipate little volatility over the next month. 

On Monday, when the stock market crashed more than 5% during morning trading, the VIX spiked above 65 – to its third-highest level ever. 

The only other times the VIX was higher than Monday morning? During the 2008 Financial Crisis and the depths of 2020’s COVID Crash. 

Clearly, investors were very fearful on Monday. 

But on Tuesday, that fear rapidly dissipated. In fact, as of this writing, the VIX is down about 35% on the day – its biggest single-day drop ever. 

That is quite significant. Typically, massive single-day drops in the VIX have been historically consistent with moments when stock market selloffs transform into major rebounds. 

Over the past 35 years, the VIX has dropped more than 20% in a single day nearly 20 times. About 70% of the time, stocks were higher six months later. More than 80% of the time, stocks were higher 12 months later. 

But that also includes many “false signals” from the Great Financial Crisis. Throughout 2007 and 2008, the VIX swung violently as the economy was plunging into its worst recession in a century. 

Excluding those readings, stocks were always higher six and 12 months after a 20%-plus single-day drop in the VIX, with an average 12-month forward return of almost 20%!

The Final Word

Here’s how we interpret that data… 

Either the economy is on the cusp of falling into a huge recession, or stocks have most likely bottomed in this selloff. 

However, the data doesn’t support the notion that the economy is on the cusp of falling into a huge recession. GDP growth remains positive. The unemployment rate remains relatively low. Business sentiment survey data is generally positive, and consumers are still spending and traveling. 

So… if the economy isn’t on the verge of an intense recession… then history suggests that this stock market selloff is over – and could soon turn into a powerful rebound rally. 

That’s what we’re seeing today. And we expect to see more of this rebound in the coming days and weeks. 

That is why, just this morning, we recommended three new AI stocks that we think can soar over the next few weeks and months. 

Learn more about those promising picks.

_{On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.}

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