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Volatility charts suggest now is the time to buy into stocks

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After inspecting the charts of the Cboe Volatility Index — a market measure sometimes referred to as the “fear gauge” or the VIX — volatility expert Mark Sebastian thinks that the market could soon exit its bearish phase.

Stocks have been trading choppily since early October, mainly on uncertainty surrounding the Trump administration’s tariff policy and the Federal Reserve’s plans for raising interest rates. The declines, led largely by shares of big-cap technology companies that reported earnings that Wall Street saw as underwhelming, have caused panic in the market.

But Sebastian, an expert in market panic, the founder of OptionPit.com and a colleague of CNBC’s Jim Cramer at RealMoney.com, told Cramer on Tuesday that the VIX’s charts suggest the worry among investors has subsided.

“[The] charts … suggest that it’s time to start doing some buying,” Cramer said on “Mad Money.” “[Sebastian] thinks you might not get another chance as good as this one for the rest of 2018. I don’t know if he’s right, but don’t you find it heartening when you consider how right Sebastian’s been in the past?”

In October, when stocks found some reprieve after a week of selling, Sebastian predicted that the pain wasn’t over yet, noting that the VIX’s peak doesn’t always coincide with the market’s real bottom. He was right, and the sell-off continued. It was only over when, three days later, the S&P 500 made its lowest low yet, but the VIX failed to make a higher high.

That trend is a cornerstone of Sebastian’s theory about the market’s current situation, Cramer said.

“Markets can indeed fall without the VIX rallying, albeit only for short periods of time,” he explained.

The reason is actually quite simple, according to Sebastian. Based on past sell-offs, like the ones seen in this chart of the S&P and the VIX in 2018, investors eventually get jaded enough that they stop hedging against market swings. That leads them to stop buying S&P options, sending the VIX — which tracks S&P option prices to measure implied volatility — lower.

This chart shows the VIX spiking during the first sell-off of 2018 in February, then essentially brushing off the second leg down in March, Cramer noted. That pattern repeats itself on a smaller scale in October and November.

“The sell-off in October blindsided a lot of people. The sell-off in the last couple of weeks blindsided nobody. Even investors who thought we were ready to rally knew that there was another down-leg possibility,” Cramer explained. “When the VIX and the S&P start behaving like this, Sebastian says it’s almost always a sign that the stock market is actually trying to find a bottom.”

Pairing that with the action of the Cboe VIX Volatility Index — a derivative of the VIX that has been dropping in recent days — Sebastian saw “an incredible sign” that a bottom may be at hand, the “Mad Money” host said.

When the VVIX is in free-fall, it means that money managers who bet on the action of the VIX itself think that volatility will go down, not up, Sebastian said. That means that the likelihood of dramatic market swings is, in their view, getting lower.

“Maybe the VIX is signalling that the Fed might be in one-and-wait mode — one rate hike and then wait and see — or that the president may actually have something positive up his sleeve when he has dinner with the Chinese president this weekend,” Cramer said. “Stranger things have happened, and if they do, the bear might finally, at last, hibernate.”

Stocks ended the day higher on renewed hope of a trade deal between the United States and China being made at this week’s G-20 summit. The VIX ticked up slightly to just above 19.



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Stocks

Retail earnings reports, China trade impact

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CNBC’s Jim Cramer on Friday said he expects more of the same in the week ahead of stock trading.

“Next week, once again, is all about trade and retail,” the “Mad Money” host said. “This is the week when most retailers report, so we will be listening closely to what they say about the trade war.”

Monday: Trade watch

The stock market will confront the same issues on Monday as the week prior. The days following will see a lot of retailers hold conference calls, and Cramer is looking to see what they have to say about tariffs on Chinese imports.

“The market will punish companies that source in China and reward companies that don’t, because that’s what [President Donald Trump] is doing,” he said.

Tuesday: Home Depot, TJX, Nordstrom

Home Depot: The home improvement retail giant reports earnings before the bell. Cramer is expecting weather to weigh on earnings again.

“There’s much too much rain this gardening season, and I bet that hurt them,” he said. “I still believe Home Depot can tell a decent story about trade, but it won’t matter if gardening season, their equivalent of Christmas, turns out to be a bit of a bust.”

TJX: The T.J. Maxx parent delivers its quarterly results to shareholders in the morning.

Nordstrom: The luxury department chain has an earnings call at the end of trading. The stock is down more than 20% this year and more than 27% in the past 12 months.

“At these levels, it pays you a 4% yield. I think it may be too cheap to ignore,” Cramer said.

Wednesday: Lowe’s, Target

Lowe’s: Lowe’s, the main rival to Home Depot, presents its quarterly earnings before the market opens. CEO Marvin Ellison is guiding the home rehab chain through a turnaround.

“Wall Street loves Ellison, though,” Cramer said. “If Lowe’s gets hit, either before or after the quarter, I’d be a buyer of the stock.”

Target: Target comes out with its latest results before trading begins. The stock is about $20 per share off its September high and has a 3.6% yield.

“I know it’s battling both Walmart and Amazon, which might be too much competition for any one company, ” Cramer said. “But I think CEO Brian Cornell’s doing a terrific job. You know what, I like the stock here.”

Thursday: Best Buy, Splunk

Best Buy: The tech gadget store reports earnings in the morning. The stock is up 30% this year, and Cramer is warning not to take a chance on it at current levels.

“I’m betting they’re going to have to talk about tariffs on the whole darned conference call,” he said.

Splunk: The software analytics company, one of Cramer’s “Cloud King” stocks, presents its financial report after the market closes. Cramer expects Splunk to put up a good conference call out of CEO Doug Merritt. He said Merritt continues to deliver on promises.

“I like it a lot. … [It’s got] no China exposure — I say buy,” he said.

Friday: Foot Locker

Foot Locker: The shoe retailer will lay out its quarterly report for investors before stocks start trading. With a presence in shopping centers across the country, Foot Locker carries Nike, Adidas, Under Armour and a range of other sports apparel brands in its stores.

“The stock’s been held back by trade war worries,” Cramer said. “I bet it will prove to be immune, or at least more immune than most people think.”

WATCH: Cramer breaks down the week ahead in earnings

Disclosure: Cramer’s charitable trust owns shares of Amazon.com and Home Depot.

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

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Questions, comments, suggestions for the “Mad Money” website? madcap@cnbc.com



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Charts suggest markets could soon get a deep correction

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CNBC’s Jim Cramer said Thursday that his colleague is warning that danger could be on the horizon for the stock market.

The “Mad Money” host took a look at chart analysis as interpreted by technician Carolyn Borogen, Cramer’s coworker at RealMoney.com who also runs FibonnacciQueen.com, to understand what could come of this volatile market.

The major U.S. averages were taken for a ride this week as investors attempted to gauge whether the United States would raise existing tariffs on imports from China on Friday. Because of this uncertainty, the best way to get an empirical reading of the market is through studying chart action, Cramer said.

The high-to-high cycles, as explained by Boroden, in the weekly chart of the S&P 500 is cause for concern, the host said.

Highs on the index have ranged between 31 weeks and 36 weeks, and the most recent peak was recorded last Friday, he said. Prior to that, the last major high was set in September, which preceded the stock sell-off in October.

Markets tend to repeat themselves, and because stocks sold off this week after a big run, Boroden thinks there could be cause for concern.

“In fact, she’s looked at a series of previous high-to-high cycles, and what she’s noticed is that there’s a whole confluence of them coming due this month,” Cramer said. “That’s why she’s throwing up a caution flag, because Boroden thinks we might finally get a deep downside correction — even deeper than what we’ve already experienced during hell week.”

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These 6 stocks could make or break the S&P 500’s run

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Call them the Supersized Six.

Microsoft, Amazon, Apple, Alphabet, Facebook and Berkshire Hathaway — six of the most highly valued companies in the S&P 500 — don’t just boast the index’s biggest market caps.

In fact, those six companies are worth about as much as the bottom 290 companies in the S&P combined. Taken together, their market caps total $4.2 trillion, while the bottom 290 S&P companies are worth roughly $4.3 trillion.

It’s fairly common knowledge that the top 50 S&P stocks are worth more than the bottom 450, and it’s not unusual that the market is frequently this “top-heavy,” says Carter Worth, chief market technician at Cornerstone Macro.

But the concentration in these six names is noteworthy, and it could mean trouble for the market, Worth said Tuesday on CNBC’s “Fast Money.”

Considering the influence they have over the S&P’s direction, it makes you wonder: “Is it an index, or is it a few big names that drive everything?” Worth said. “That’s what makes beating the index so hard.”

He called attention to this chart tracking the six-stock basket against its 150-day moving average, as well as the number of times it has traded above or below that average.

“Literally, every single time we have gotten this far above the 150-day moving average, we have peaked. It is right at that level yet again,” Worth said, pointing to the uptick in the bottom panel’s trend line. “So, as this goes, so goes the market. I think you’ve got a crowding that’s not so good. Just to put it in real context, think of those six names relative to the S&P. It’s all so dependent on these big names.”

Moreover, while the market’s “heavy hitters” have made up 15% of the S&P’s total market cap, on average, since at least the 1990s, that percentage is also ticking up, Worth noted.

“We’re starting to get back to a level that is typically indicative of when markets peak. That’s ’07, so forth and so on,” he said. “None of this is particularly healthy.”

By market cap, Microsoft is worth about $963 billion, Amazon is worth $949 billion, Apple is worth $969 billion, Facebook is worth $540 billion, and Berkshire Hathaway is worth $515 billion.

The broader market mounted a recovery Wednesday, with the S&P lifting off its Tuesday lows early in the session.



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