Max Pessimism

Today is the last day of September, the most bearish month of a year. And this week is the most bearish week of the month! With the new lows below the last Jun low, we are likely seeing the maximum pessimism at the moment. One indicator is the VIX/VIX3M ratio.

VIX is the volatility index for the next 30 days  and VIX3M is for the next three months, or 90 days. Normally the shorter term VIX has a lower value than the longer term VIX3M, so the VIX/VIX3M should be below 1. But from time to time, when investors are extremely nervous about the near future, they my push VIX higher than VIX3M, causing the ratio above 1.

This tells us that traders have pushed the market toward maximum pessimism. As a contrarian indicator, it suggests a bottom is formed. Below are the corresponding SPX price movies following each time when the ratio was above 1. What will happen this time? Anyone's guess but my money is betting on a bounce, probably a forceful rip-your-face-off type of revenge rally in the days or even weeks ahead.