As the market surges higher and earnings reports continue to top expectations, Jim Cramer turned to one technician's charts to find out whether the upward move is sustainable.
Being an expert on the CBOE Volatility Index (STOXX: .VIX)— VIX for short — Sebastian compared the near term volatility tracker to the S&P 500 (INDEX: .SPX) to show the strength of the market's trajectory.
When the major average soar, the VIX goes down because there is less fear in the market. Conversely, when the market dips, the VIX spikes.
"Sebastian says that sometimes the best way to measure the strength of an up move is by looking at the severity of the decline in the Volatility Index," Cramer said. "In other words, when the VIX really gets pounded, you know you're looking for a terrific run."
First, Cramer looked at the moves of the S&P 500 and the VIX over the last two years. The S&P's rallies mirrored the VIX's declines, and after each big advance, the market kept rising.
Before the most recent upswing, which occurred just after the U.S. election in early November, Cramer noticed that the market faltered. Wall Street was fairly certain Hillary Clinton would win, but FBI Director James Comey reopening the email investigation threw a wrench in the market.
The S&P 500 slid down about 3 percent, but the VIX jumped from 13 to 22, much too large a spike compared to the S&P's mild sell-off.
"Sebastian would've expected a 5 to 7 percent decline given the action in the VIX," Cramer said. "He says we tend to see this kind of behavior when the market's worried about what might happen, not what is happening."
A similar disconnect happened after President Donald Trump was elected and incited panic on the Street because so many money managers were banking on Clinton.
The VIX had already gone down from when the Comey investigation was dropped for a second time, but it went lower still after Trump's victory as the S&P saw the beginnings of a months-long rally.
"This was a great example of the VIX forecasting a terrific move," Cramer said. "Immediately after the election results, [...] if you took your cue from the volatility index, you knew it was time to do some buying and you caught the beginning of November's phenomenal Trump rally."
Ahead of Sunday's French elections, traders and investors alike were worried about the possibility of a runoff between the far-right and far-left candidates, pushing the VIX higher.
When centrist Emmanuel Macron came in first place, the S&P took off, rallying 1.6 percent since Friday's close. But the VIX saw an even bigger drop, cratering at the unusually low level of 10.5.
"Looking at this moment through the prism of the big rally we got last November when the VIX plummeted, Sebastian thinks this is showing that we have got a lot more room to run," Cramer said. "Based on the action in the VIX, he easily sees the S&P traveling to 2,450 before it runs out of steam."
While this is a promising sign, Cramer urged investors not to go off chasing stocks, a very high-risk practice. But if you're already invested, he recommends staying the course.
Watch the full segment here:
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