In a difficult time for investors, it is refreshing to report a ray of hope in the charts below. In addition to the positive technical developments, two fundamental developments may help the market find an intermediate bottom:

• The Fed injected massive amounts of cash into the banking system in an effort to get banks lending to each other again.
• Senator Charles Schumer proposed a new agency to pump capital into financial companies.

As mentioned in a September 17th article, both the VIX and the NYSE New Highs - New Lows indicators have been signaling a possible intermediate bottom in stocks. Here is some text from the September 17th article:

"The two charts below say we may be approaching an intermediate bottom. The chart of the Volatility Index (a.k.a the VIX) is a way to measure market participants’ fear of potential losses. Markets tend to make bottoms or reverse trend when fear levels are high. Conversely, markets tend to top or peak when people are confident more gains lie ahead. The green circles show the last three market tops in 2008 (a low reading on the VIX). The pink circles show the bottoms made in 2008 (a high reading on the VIX). The dark green box shows the VIX as of Tuesday's close [now Thurday's]. A VIX reading in the mid 30s is more indicative of an intermediate (temporary) bottom rather than a bottom which would put an end to a bear market."

The charts below have been updated as of the market's close on Thursday, September 18, 2008.

Again, from the September 17th article:

"The VIX peaked in the mid 40s in 2002, so there is room for significantly more downside in stocks. Yesterday's high on the VIX was roughly 34...However, a reading of 34 on the VIX can signal we may be approaching a multi-week rally in stocks."

A VIX Reading of 42 is Rare and Positive For Stocks

Thursday's intraday high on the VIX was 42.16, which shows a rare and high level of fear. Since we are in a bear market, comparisons to high VIX readings in the 2000-2002 bear market are helpful. There were two times in the 2000-2002 bear market where the VIX closed above 42 and stocks reversed course soon thereafter; on September 21, 2001 and July 24, 2002. From September 21, 2000 to January 3, 2002 (after the VIX went over 42), stocks staged a 24.5% bear market rally from the lows. After a reading of 42 on the VIX was made on July 24, 2002, stocks again gained 24.5% before reversing on August 22, 2002. A reading of 42 is rare on the VIX. The fact that we hit 42 yesterday means the odds favor some stock gains in the coming weeks.