The golden question on everyone's mind right now is when the amazing Trump rally will run out of steam. Unfortunately, Jim Cramer does not know the answer to that.
The good news is that the market can give hints, as long as a trained eye knows how to look for them. That is why Cramer enlisted Mark Sebastian to take a look at the relationship between the averages and the CBOE Volatility index, known as the VIX for short, which measures the level of volatility that traders expect in the near future.
"In times of euphoria you need a non-emotional gut-check, and as the technicals … suggest that we could still be in the early innings of this rally," the "Mad Money" host said.
Many investors also use the VIX as a fear gauge, as it can provide insight during times of panic or euphoria in the market. Sebastian is a technician who is the founder of OptionPit.com and colleague of Cramer's at RealMoney.com. He also happens to be an expert at reading signs for the VIX.
Sebastian found that right after President-elect Donald Trump's surprise victory, the VIX fell as the market climbed. That was a sign that investors believe in the rally, and it isn't finished yet.
This is the same pattern that has dominated all year. As the volatility falls and the market rallies, things will continue to go well. It happened in the rally from February to June this year.
As long as the volatility index declines, Sebastian thinks the rally is worth believing in. However, if the VIX starts to rise as stocks go higher, that is a sign to start worrying, he said.
When the VIX and the market move in the same direction, it typically means that the market is about to change course.
"For now, that is not a concern," Cramer said.
Things looked even brighter when Sebastian took a look at the VVIX, which measures the volatility of the volatility index itself. Sebastian discovered that after the election, the VIX actually dropped much faster than the VVIX. That suggested to him that large institutional money managers weren't buying into the rally.
However, in the past week, the VVIX has fallen dramatically. To Sebastian, this confirmed that the Trump rally has staying power.
"When the VIX starts to rally along with the S&P, that is when you start worrying," Cramer said.
Until then, Cramer recommended to just enjoy the ride.