"The Wall Street Wizard": The bottom of the US stock market has appeared!

According to Tom Lee's report on Wednesday from Fundstrat, the performance of the Chicago Board Options Exchange Volatility Index (VIX) indicates that the bottom of the US stock market may have been formed.

The VIX index set a historical record on Monday, soaring 172% to 65.73 during the session, marking the third highest level in the history of the index. This surge occurred during a severe unwinding of yen carry trades, leading to a widespread decline in global risk assets.

The VIX index has only reached higher levels twice before: once at a peak of 89.53 during the 2008 financial crisis, and another at a peak of 85.47 at the beginning of the COVID-19 pandemic in 2020.

However, since reaching the historical third highest level on Monday, the VIX index has rapidly fallen from 65.73 to 27.71 on Tuesday, a drop of 58%. Despite this, it still remains significantly higher than levels before the market sell-off.

Lee stated: "The drop in VIX from 66 to 27 is a positive signal, further indicating that this is a 'growth panic', and the worst case scenario is likely behind us." He also added that the normalization of VIX confirms that the recent sharp drop in the US stock market is not a systemic crisis.

By the closing price, the VIX dropped by 28.2%, marking the second largest single-day decline on record, second only to a 29.6% drop on May 10, 2010. The latter occurred on a trading day following a flash crash, when the Dow Jones Industrial Average plummeted about 9% in a few minutes.

Ryan Detrick, Chief Market Strategist at Carson Group, mentioned that after such a rapid decline in VIX, US stocks tend to experience significant gains in the near future.

Detrick said: "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, after the US debt downgrade in August 2011, and in March 2020. These three times were quite bullish periods for investors, with the S&P 500 index rising each time by an average of 37% a year later."

Fundstrat referred to comments from last Friday in their new report on Wednesday, predicting that US stocks may have bottomed out this week. At that time, the VIX rose by 65% in three days. It is worth noting that on Monday, the VIX rose by 65% again, while the S&P 500 index experienced its worst day in two years.

The company's research found that since the launch of the VIX in 1990, there have been nine instances where the VIX rose by over 65% in three days and closed above 25. In almost half of these cases, the US stock market found a bottom within a few days, with the median return of the S&P 500 index in the next three months being 7%, with a 100% success rate In his video update to clients on Tuesday, Lee said, "Whenever the VIX surges like this, half the time you are at the end of a decline and will bottom out within two days, so I believe that the rebound starting today meets these parameters."

Since the VIX peaked on Monday, the S&P 500 index has rebounded by 4% and the Nasdaq 100 index has risen by about 5%.

Looking ahead, lower interest rates have long been seen as a positive catalyst for the US stock market. According to the CME Group's FedWatch Tool, investors expect the Fed to cut rates by 100 basis points by the end of this year.

Lee stated, "The actual cost of funds will decrease, which will bring significant benefits to consumers applying for mortgages, car loans, as well as other types of borrowing tools like credit cards and business loans."

In summary, the market is showing strong signs of stabilizing. Lee said, "We also believe that this panic will ultimately be a 'growth panic'."