Most of you know I'm also a fan of the CBOE Volatility Index, or VIX. I've found it to be a reliable contrarian tool. When it says investors are wildly terrified, I get bullish. When it says the market is euphorically bullish, I start taking profits. And, using the tool has guided me right the vast majority of the time. 

Well ladies and gents, the VIX reached all-time highs on Monday, telling us that investors have never been more fearful - at least based on option prices. 

I don't know about you, but when I start seeing things I haven't seen in a couple of decades (or ever, in the case of the VIX), my curiosity is peaked. 

Rather than guess about the potential outcomes from here, I decided to go back in time and look at comparable plunges where stocks got crushed and fear was boiling over. The good news is this was pretty easy to do - there were only a few cases where it's happened to Monday's extent. 

The nearby table shows you the days I'm interested in - some of the worst of all time, accompanied by a sky-rocketing VIX. A couple of the early ones were pre-VIX (though the older VXO was around at the time ... and through the roof those two days). 

You'll also notice in a couple of cases the event day itself wasn't all that bad for the market despite the fact that the VIX was in the stratosphere. In those instances, the pain for the market came slightly ahead of the VIX spike. The post 9/11 selloff, LTCM, and the WorldCom debacle are specifically what I'm taking about. All three drove stocks lower for a few days before the VIX spiked. 

Anyway, yesterday is a real eye-opener when put in this perspective. 

Now that we know just how rough it was, let's round out the discussion by tracking what happened in the days following those peaks in fear and/or massive plunges. 
 

	The Aftermath of a Blowout

Check out the nearby table. We're looking at the same blowout dates we looked at above. This time though, we've added the market's return over the following six months. The data is what it is. Though many investors were sure it was the beginning of the end in all seven prior cases, it was actually the beginning of a bullish period in all cases. 

With all of this being understood, I do want to make one thing clear ... I'm not making a bullish call yet. On the other hand - based on history - the odds say the spike in the VIX and the massive selloff could be the final proverbial nail in the coffin. That's ultimately a good thing. 

That's the nasty part about bottom-fishing. It's kind of like trying to catch a falling knife - you better do it right or you're going to get cut. I'd rather be sure the knife has hit the floor before trying to pick it up. So... 

I think we're close to a bottom in terms of time. The data is the data. Personally though, I need to see some reversal clues I haven't seen yet. Today may have been the first stage of those clues, but I'm still a tad skeptical. 

Specifically, I can't escape the fact that doesn't show up in the table above. 

While the VIX's 'spikes' were one day events, in several of those cases the VIX also lingered at shockingly-high levels for weeks on end. If the VIX parks itself up here above 40 for a while, that will negate any spike shape. 

Nevertheless, I'm not going to refuse to be bullish if that's the shape things take ... which is a distinct possibility as history has shown. 

But this time is different, right? Won't the lack of liquidity and the stifled credit market have lingering effects on the economy? 

It's true that the cause of the illness is different this time, but the symptom is the same as it always is. Whether it's good or bad, I don't know, but the economy's and the market's overseers have a tendency to treat the symptom first ... as they are doing now. So, I can't think of any reason why the outcome for stocks should be different this time. 

Valuations? When's the last time a stock actually traded at what it's worth? Unfortunately the game isn't about current values. It's about perceived future values. The question we need to ask is if the market collectively thinks stocks are going to be worth more six months from now than they are now. 

Anyway, I'm sure the next few days are going to be interesting at least, and probably historic. My stance on the whole thing is only a cautiously-bullish one, but if stocks start to firm up I'm going to start taking on major long-term positions again. 

Oh yeah, if you really want to put all the above data into perspective, this long-term chart of the market and the VIX should do the trick. It pretty much illustrates where I'm coming from right now. It may convert you into a believer too. 
 

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