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:
This market is a bloated pig.
— Sven Henrich (@NorthmanTrader) August 14, 2020
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:
NEW: The recession is largely over for the rich. The working class remain in deep pain.
-Stocks r near record highs
-Home values at all-time highs
-Jobs r back for affluent
— Heather Long (@byHeatherLong) August 13, 2020
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