Stocks have rallied hard recently, but charts indicate that there is more room to run, Jim Cramer says.
"The big bull run over the past three weeks might not yet be over," the "Mad Money" host said.
To gain further insight, Cramer consulted with technician Mark Sebastian. He is the founder of OptionPit.com, a colleague of Cramer's at RealMoney.com and an expert on the CBOE Volatility index, also known as the fear index.
Many investors use the VIX to measure a perceived volatility in the . In the heart of the Brexit sell-off, Sebastian advised Cramer that the market would come roaring back. He nailed the bounce on the morning of the exact day it occurred.
Sebastian made the call by comparing the S&P to the VIX. Normally he expects the VIX to fall when the S&P rallies. Three weeks ago, Sebastian noted that as the S&P continued its vicious decline, the VIX actually went down with it. That was a textbook sign to him that the sell-off was ending.
"He believes that the bull still has legs, at least for now. Why? Because everything is behaving normally," Cramer said.
Looking at the daily charts for the VIX and the S&P, it was clear that as the S&P has gone higher, and the VIX has continued to fall lower. Thus, in order for this rally to continue, the VIX must remain at lower levels. That will indicate that fear is low and the market can keep climbing.
Sebastian is looking for two signs that will indicate an end to the rally. He used the VVIX, which measures volatility within the VIX itself. He said if the VIX continues to go down, but the VVIX starts to rally that could indicate an increase in demand for variance swaps.
Big institutional money managers trade the VVIX to hedge long positions. If the VVIX rises, but the VIX stays low, that could be an indication that big money is getting less comfortable with the market, Cramer said.
The second warning sign that Sebastian is looking for is if bond yields begin to creep up. That could cause dividend yielding stocks to be less attractive and trigger a market-wide sell-off. As long as bond yields stay fairly low, Sebastian thinks the S&P 500 could hit 2,200 in the next month.
"Since Sebastian nailed the post-Brexit bottom, I am inclined to stick with him and let it ride," Cramer said.
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