A sharp reversal in the stock market’s fear index means the worst is over for investors, according to Fundstrat

• Wall Street’s fear indicator reversed its trend after a historic rise earlier this week.

• The VIX hit its third-highest level in history on Monday as the yen carry trade unraveled violently.

• The magnitude of the VIX reversal since then shows that the worst of the fear is over, says Fundstrat’s Tom Lee.

The historic rise and subsequent decline in the Wall Street Fear Indicator suggests that the worst of the stock market’s “growth scare” is over.

That’s according to Fundstrat’s Tom Lee, who said in a note released Wednesday that the CBOE Volatility Index, better known as the VIX, is behaving as if the stock market has bottomed.

The VIX made history on Monday when it climbed a record 172% intraday to reach the 65.73 level, representing its third highest level ever recorded. This increase occurred in the middle a violent unwinding of the yen carry trade, which has caused risk assets to plummet worldwide.

The only time the VIX has reached a higher level was during its peak of 89.53 reached during the Great Financial Crisis in October 2008 and its peak of 85.47 reached during the COVID-19 pandemic in March 2020.

But since it hit its third-highest level ever on Monday, the VIX has fallen sharply, The stock price fell from 65.73 to 27.71 on Tuesday, representing a 58% drop from peak to trough. It is still significantly higher than where it was trading before the market crash.

“The VIX drop from 66 to 27 is a positive sign and a further sign that this is a ‘growth scare’ and the worst is likely behind us,” Lee said, adding that the VIX normalization confirms that the stock market’s slide over the past week is not a systematic crisis.

At the close, the VIX closed down 28.2%, its second-largest daily decline on record, eclipsed only by the 29.6% decline seen on May 10, 2010, which was the next trading day. a flash crash caused the Dow Jones index to fall by about 9% in a matter of minutes.

Ryan Detrick, chief market strategist at the Carson Group, told Business Insider on Wednesday that when the VIX sees such rapid declines, the stock market tends to see significant gains in the future.

“The VIX closed down more than 10 points yesterday, which is very rare. The last time this happened was after the Flash Crash in May 2010, the downgrade of US debt in August 2011 and March 2020. All three periods were quite bullish for investors and a year later the S&P 500 was higher each time and up 37% on average,” Detrick said.

Fundstrat’s new note on Wednesday referenced a comment from last Friday that suggested stocks could bottom this week. At that time, the VIX was up 65% in three days. Note that it climbed another 65% on Monday, as the S&P 500 had its worst day in two years.

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The firm’s findings showed that since the VIX’s inception in 1990, there have been nine times when the VIX has seen a three-day rally of more than 65% and closed above the 25 level.

In almost half of these cases, stocks bottomed out in just a few days and S&P 500…