Market Analysis

$VIX 46 (Part 2)

Our liquidity soaked markets keep beating ever higher as the monetary Praetorian Guard, otherwise known as the Federal Reserve, has dispersed any would be sellers. Some permabulls, all giddy that the Fed has once again bailed them out, are again roaming Twitter mocking bears or anyone with a contrarian view of all the damage that is being done to our society and economy as a result of the ever widening wealth inequality and the mountains of debt piled on to pay for all the Wall Street rescues.

And so the cycle continues. Ever more bailouts, ever more complacency in the face of constant interventions raping the very foundations of the construct once known as free market capitalism and price discovery.

But as predictable as the mockery so are the elements of market patterns that suggest another larger volatility spike may be coming our way new highs notwithstanding.

Calling for a volatility spike is a notoriously difficult call to make especially in markets so driven by artificial liquidity. Recall on January 6, when $VIX was trading at 14 I made a call for $VIX to hit 46:

And I was instantly mocked a permabear:

But then the mocking stopped:

Point is: Trolls know nothing and you got to stick to your calls. Some may be right, some may be wrong, but that’s life.

Which brings me to the here and now. $SPX got to within a whisper of the February highs this week and may still make new all time highs as long as valuations and reality don’t matter I suppose.

But from my perch $VIX is setting up for another spike and I outlined my rationale this morning on CNBC and I’ll let the clip speak for itself:

The renewed compression pattern I was talking about can be seen in the chart below:

I can’t say whether the February gap will fill first before a break out or not. The February gap was always a target as all $VIX gaps eventually fill. Hence the $SPX February gap was always a risk target. Now $SPX has slightly exceeded that gap, but $VIX has not yet filled its gap, which is perhaps notable. Why not?

After all the August price action has been extremely mundane with extreme tight price ranges and $NDX making new highs and $SPX making a new all time closing high. Hey, maybe next week, during OPEX week, $VIX indeed get pummeled into that gap, I can’t say.

But be clear, this compression pattern here is once again very clean and it suggests another spike is coming. As with the January call it may take a while and then happen suddenly, or it may not happen at all if the Fed continues to remain in full control. I can’t be certain if and when it does happen but I can be certain there won’t be any acknowledgements from the mocking permabulls, but rather renewed cries for Fed help.

No, $VIX spike calls are notoriously difficult especially in regards to timing as $VIX tends to base on the low end for weeks, especially with a Fed whose real self declared mission statement is to calm markets, continuing to push the buttons. Well, from my perch, the market may be calm but also:

We’ll see. Some people may celebrate new market highs in the face of catastrophic pain for millions. And I get it. 401k’s have been saved, a sigh of relief that the damage has been averted, so I understand the sense of joy in that. But personally, and this is a really contrarian view, I think it’s a tragedy for 2 reasons: One is the obvious: None of the market gains are earned. They are a bailout and they are based on multiple expansion not on anything really fundamental based. So if you want to take pride and joy in gains delivered by a committee be my guest, but know that’s what it is, nothing else. Markets wouldn’t be anywhere near here were it not for trillions of dollars in bailouts.

Second, and perhaps more poignant: In past recessions most people took some pain, many a lot of pain. Not this time:

What an insult to the many millions that have lost their jobs and are struggling to make ends meet. What a giant middle finger to see America’s rich again dancing to the tune of the Fed piper enjoying their riches while society again drifts apart with ever wider wealth inequality.

We may want to pretend that all of this is consequence free. My view is it’s not. All this debt, all these divergences and divisions are making society and our economy ever more fractured and therefore ever more unstable in the long run.

In this context perhaps $VIX 46 is eventually way too conservative.

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Categories: Market Analysis

20 replies »

  1. This market is nothing more than raging insanity. When reality finally hits, it will appear to bulls (are there any bears left?) that Armageddon is upon us..

      • Very well said Sven.
        This US pandemic crisis has been the biggest win for wall street, bankers and politicians.
        And meantime main street is hurt like never before.
        The biggest robbery from the establishment to the US of A.

  2. Thank you Sven. I don’t know how you stomach all of those trolls…..but I see logic and sanity in your view.

  3. patience….this will eventually end in a tragedy. The total delusion I hear these days from so many “educated” people that debt doesn’t really matter…is astonishing

  4. Excellent analysis Sven. All the markets need is an external macro event to trigger the next leg down to re-test the March lows. As reality sets in about the true damage done to our economies from these lock-downs in the months and years to come the markets will catch up and drift lower and lower for the next few years. 7 years of famine have begun again.

  5. Sven – I could care less if my investments go up another 10-20% this year, as what is the use of monetary gains when the society around us is literally falling apart on a mental health level due to financial and pandemic chaos. I suspect inequality spurred by the Fed has a lot to do with the collapsing mental health of 80% of the population who own almost no stocks, and are having issues simply feeding their families due to the ever increasing stealth (fed hidden) inflation on anything one needs to survive.


    A new study from the Centers for Disease Control and Prevention (CDC) finds the number of Americans reporting adverse mental health or behavioral changes — like drinking or drug use — on a perilous rise in recent months.

    About a quarter of Americans reported symptoms of an anxiety disorder, three times higher than what a similar survey found a year ago. Those reporting depression has quadrupled, to nearly a quarter.

    About 13 percent of Americans said they were drinking or using drugs more because of the stress of the pandemic. And almost 11 percent said they had seriously considered suicide in the last month, including more than a quarter of those between 18 and 24 years old.

    In total, 41 percent of Americans said they were suffering from one or more symptoms of serious mental health problems. The CDC said treating those conditions was an essential part of the response to the pandemic.

    More than 21 percent of essential workers had considered suicide in the last month, and a quarter of those workers said they were using substances more now than they had before the pandemic.

    About one in five Americans say they know someone who has tested positive for the coronavirus, while 8 percent say they know one of the approximately 160,000 people who have died in the United States.

    The CDC survey included responses from 5,412 American adults between June 24-30.

        • That’s not true. That’s the narrative now but that story will change when the market heads down for a sustained period of time and the billionaires have already bought all inverse etfs and then want you to buy late.

  6. I continue to appreciate your thought process. I looked at this scenario just last night and my gut said ” Danger Will Robinson” , but I grew up in a family of skeptics that only shorted the market. I know I’m tainted but I live in a 60/40 financial advisor world and and I am the crazy uncle we don’t talk about. It’s OK, I got a stack and if I could remember where it is, it may be important to them someday. Maybe! Your content is fantastic keep it up!

  7. re: “bloated pig” tweet link to quoththeraven. They got Buffett’s gold miner buy perfectly. It took 3 months to play out. Good exercise in demonstrating trends take more than a few days to evolve.

  8. Many financial cliffs on the horizon. Equities are priced not only to perfection – but beyond perfection. The market appears long and incredibly optimistic despite the historical precedent of a second (and worse) wave in the fall, china’s second shoe yet to drop and possible election unrest (current internal sabotage of the USPS, etc) in November. Bulls believe they can get out in time if need be and there is enough time to get out with plenty of winnings if they sense trouble on the horizon. They may not have that luxury. Sven, you are voice of reason out there – and I appreciate you swimming against the current. You are obviously a gifted swimmer.

  9. I’ve completely stopped trading now. Keeping as much as possible as cash in hand in two or three currencies and tubes of coins. This is completely unsustainable and bound to end like a house of cards always does. Even if the indices just keep going up, with one ultimate buyer of last resort there can be no market left. A market consists of buyers and sellers seeking price discovery based on value inputs, supply, demand and necessity. How this crazy system reflects that can only be justified as the Soviet planned economy, or France 1788, could. On paper the country is rich and successful, its just 90% of the population that’s ……..

  10. great piece Sven, stick to your guns…if the market doesn’t ultimately crash, everything we know to be true about finance, economics, and debt will be false, re-write all the economic books, Mises was wrong, Hayek was wrong, Rothbard was wrong, etc…but they are not wrong, “the borrower is a slave to the lender” Prov, 22:7, governments are creating slaves everywhere, who is the borrower? and who is the lender? Cheers, M

  11. Yeah, just so hard to time with so much QE going on… The printers have been able to keep things on an upward trajectory.


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