Investors should practice caution, despite Wall Street’s big rally on Tuesday, CNBC’s Jim Cramer warned.
The market is trekking through a volatile period and Mark Sebastian, who the “Mad Money” host called “VIX master,” is urging vigilance. The VIX, or CBOE Volatility Index, gauges market risk based on investor sentiment about stocks listed on the S&P 500.
Cramer took a look at analysis from Sebastian to get a read on the state of the market.
“While he’s not predicting a big decline, he thinks you should be prepare for choppy waters and perhaps a modest pullback,” Cramer said. “The averages haven’t really digested these latest gains, and like we saw last week, big moves higher can result in some serious stock market reflux.”
The VIX, dubbed the “fear gauge,” and S&P 500 indexes typically run in opposite directions, Cramer explained. When they mirror one another, it tends to serve as a warning sign.
After a string of tumultuous trading days, the major U.S. averages rallied on Tuesday and the VIX slipped to about 18, Cramer noted. Opening the day under 2,884, the S&P 500 surged on the news of a tariff delay to trade above 2,943 before virtually flat lining to finish the session under 2,927.
“While we’ve had a lot of turbulence, Sebastian’s worried that the volatility index seems to be creeping up along with the stock market,” Cramer said. In recent years, “every time the S&P’s had a rapid rally that failed to really bring down the VIX … it resulted in some sort of sell-off … The most notable one being the big blowup in January of 2018.”
Sebastian, a technical analyst and founder of OptionPit.com, thinks the VIX is flashing a yellow light as long as the index stays above 16. The chartist cautions that the upside is more limited than most may expect, Cramer said.
“He says the market needs to pull back a bit for a couple of days, then hopefully we get a slower, more logical rally,” Cramer relayed. “Until we digest these recent gains, Sebastian predicts that the fear gauge will stay above 16 and this market’s going to chop around.”
WATCH: Cramer goes off the charts to understand investor sentiment in the market