The Curious Case Of The VVIX Index

This year has been marked by a sideways market with V shaped ups and downs.  There have been a lot of concerns including China Equity crash, Greece default, High Yield deterioration and collapsing commodities but yet the VIX has remained stubbornly low.  However the VVIX Index or the volatility of the volatility has been creeping up.  It can be noticed on the two charts below.  The first chart is just the VVIX index.  As you can see the VVIX index bottomed last May/June around the same time that credit spread narrowness peaked.  Additionally oil peaked then as well and began its historic plummet.   Ever since then the VVIX has been making higher highs and higher lows.  The second chart is the VVIX/VIX ratio which is showing a narrowing of the band which is trending up.  

Basically these charts are saying that while the outward appearance of the market is calm the increase in the implied volatility on the VIX (the VVIX) suggests an upcoming major shift in the stock market is coming.  So a breakout is coming very soon and it will be violent and swift.  Which way is the direction? My guess is that after a 6 year bull market with tightening financial conditions (see the GS Financial Conditions Index chart below) the direction is much much lower.  I could be wrong and I am prepared to step aside if that occurs.

This week we have Options Expiration day on August 21st so the market could rally into it as it has done all year long.  However on Friday, the VVIX/VIX ratio shot up to a level that has recently suggested a near-term top is coming.  Whenever this level has been reached fading the market has paid handsomely.  Also on Friday the VVIX was green and it looks like it wants to go higher.  Either way if you are long or short caution is warranted in these unprecedented times.  Clearly my bias is that this resolves itself with a rapid repricing of stocks to the downside.  Good luck to all!  The Fall of this year should be very interesting to say the least.

 

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Since my last update credit spreads (above) are wider and while the S&P is only 2.2% from its ATHs the Dow has closed at a new low since the 7/27 rally low and the Russell 2000 closed below its 200 day for the first time in 2015.  Underneath the popular averages the breadth is awful and many stocks are in bear markets.  The bulls are very excited about the Transports bucking the trend lately but given the downside non confirmation by the Dow Industrials it is actually bearish.  Additionally the SOX index made a new closing low today.  Basically the market is slowly telling us that the Global Economy, despite the rainbow and unicorn nonsense coming from the Fed and the complicit/stupid MSM, is rolling over hard.  In addition, the commodity complex has been decimated and is trading near 2009 lows.  A fun fact is that in the summer of 1929 Jesse Livermore noticed that the commodities complex of his day was literally doing what we are seeing now.  He liquidated all his longs and built up shorts before the great deflation made its way to equities in the Fall of 1929.

Deflations cause debt liquidations which cause credit tightness which cause margin calls in non-equity instruments which eventually cause the selling of equities.  Given the amount of margin in the equity complex any minor sell-off could cause things to accelerate very quickly in equities.  The wild card of course is the Fed.  Will they attempt to reflate with QE4, will it matter or do they just let it go?  All interesting questions.  I believe they have been preventing any major sell-off but my thesis has been and will remain that mother nature will win and when she does it could be very painful and quick.  They key is credit and credit continues to widen and thats what I am watching and keeps me very short this market.  Also I have noticed that compared to the last 7 years individual short ideas are a lot easier to find and stay short.  I find that short squeezes don’t occur as often.  That is a huge tone change from years past and decidedly bearish.

Below are some of the indexes I mentioned and I also included the Advancing Volume vs Declining Volume and Advancing Issues vs Declining Issues Chart.  Notice that in the most recent rally out of 7/27 low (which already is rolling) that the movement in price was not confirmed by advancing issues or volume.  It appears to me that this market wants to drift or accelerate lower.  Everyone on the buy side expects a Fall correction of varying degrees of magnitude.  If that is the case, then perhaps we correct now as the market likes to cause immense pain to the most amount of people at any given time.  It may be time for the MOUs of the Hedge Fund community to get a head start on their competition and get their asses back from the Hamptons because it looks like Mr. market is about to do it for them.

 

 

 

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Source:Sentiment Trader

 

Source: Pension PartnersSource: Pension Partners

 

Source: Jesse Felder

 

 

In a previous life I was an Institutional Fixed Income Salesperson for HSBC in the early 1990’s.  It was there that I realized that the fixed income folks rule the world.  The size of the global credit markets dwarves the global stock markets.  The stock rally off the low of 2009 was in essence a second derivative effect of one of the greatest fixed income credit rallies the world has ever seen.  It has literally been an outright market manipulation of epic proportions.  The Fed and other Central Banks have have taken credit supply out of the market which has spilled over into a relentless bid in the equity market the likes of which we have never seen before.  This rally is not built on sound fundamentals but instead it has been built on easy credit.  Why does this matter? It matters because credit is deteriorating rapidly and the sugar high in the equity markets is about to crash hard.  I am even more convinced that the unwind will go down one of two ways.  We either crash or the Fed continues to prop this up and a revolution ensues from the continued enrichment of the few.  I say that because in order to prop this up the Fed will actually have to start buying stocks outright to prevent a crash and that is when it will become hard to stomach politically.  We should have crashed in October last year but the Fed conspired with Japan, China and the ECB in the QE handoff.  Since then the US markets have essentially gone nowhere.  So despite massive efforts of the CB’s we have reached the end game.  Each intervention which used to buy months now only buys days before gravity reasserts itself on both credit and stocks.  We have reached zero marginal return of QE and CB intervention.

The current disconnect between stocks and credit is at unsustainable levels.  Either Credit needs to quickly reverse and unicorns and rainbows continue or stocks will have a very scary correction within the next 40 trading days.  My guess is that we will see at least a 20% correction that will happen very quickly.  After that it depends on what the Fed decides to do or not do.

The first chart is from Jason Goepfert at SentimentTrader: “Over the past 30 years, the only time stocks shrugged off high yield sell-offs to this degree was in 1999-2000.”  On a two year rolling basis we are now in march of 2000.  You may have noticed the blow off top in the Nasdaq we just had on awful breadth.  The internals of whole market are dreadful and continue to deteriorate.  The indices are being held up by fewer and fewer issues.  It is only a matter of time until they collapse from exhaustion.  The second two charts show both high yield and investment grade credit spreads widening.  The final chart shows that this most recent rally is a gigantic head fake that credit does not buy into yet.  If I had to pick how the divergence closes my guess is stocks collapse quickly.  Fixed income traders are usually right compared to equity traders…not the other way around.

Complacency in the stock markets is at record highs and most folks are still looking up and have tremendous faith in the Central Banks.  Here is the dirty little secret: CBs don’t have power except that bestowed to them by market participants.  The speculators have levered up on the free money provided to them by the Fed and other Central Banks.  As long as the credit flows so does the party.  Credit markets are telling you that the party is ending.  The one thing about credit parties is that they end very very fast due to the contagion of the collateral chains.  If you choose to ignore this then do so at your own peril.  Why is the party ending? Primarily because we have issued too much debt in both the public and private markets over the last seven years that can not possibly be supported by current collective cash flows.  In fact the easy money has essentially caused deflation through mal-investment and over capacity.  The energy complex is an example of credit chasing projects that will be zeros because too much capacity was produced which lowered prices.  The credit markets are starting to sniff out this risk and it is only a matter of time until the equity markets reprice this risk.

The large ETF firms are getting bank lines ready to provide liquidity for redemptions.  If they are preparing shouldn’t you?  Larry Fink is so concerned he is trying to get the SEC to approve internal loans from BlackRock funds that have excess cash that can be lent to those hit with redemptions that lack cash.  The writing is on the wall.

 

 

 

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Given that Tsipras just submitted a deal that was virtually the same as the one before they took it to a vote this weekend I can only assume he was visited by a Dark Sith Overlord and offered a deal between gold or lead.  Maybe there is some debt relief we are not aware of yet.  Very odd to say the least.  I can’t think of any other explanation than the one I offered.  Who would create all this drama to only end up where you began?  It makes zero sense.  I welcome other explanations.

On another note China has outlawed selling stocks by most of the market save the individual investor.  This is really the most bizarro turn of events I have ever seen in my life.  What is even more bizarre is that some folks in our media are cheering on these moves by China.  The authorities are arresting short sellers so what in Gods name is our media cheering…tyranny? It really shows how desperate the central planners around the world have become.  I have no idea if we have bottomed given this news but I am staying the course for now and if we pop and fade to a new low then it is on.  Maybe they can eek out new highs but it is doubtful to me.  The wheels are coming off the bus and unless credit starts to heal the long good night is upon us.  If credit improves meaningfully I will reconsider my outlook.

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A few weeks ago I talked about The 5 Hindenburg Omens that had been spotted.  Well today we can see the Hindenburg over Manhattan on its way to potentially blow up.  The market has started to wobble and today we lost the 200 day Moving Average.  Additionally, not all is well in credit land. Notice the nicely sloping advance of widening credit spreads.  We are now almost back to the December and October highs but yet the averages are barely down in price.

The China situation is a big deal.  The crash will definitely affect Global liquidity and a scramble for cash.  The fact that the Chinese authorities are banning short sales and long only sales for certain holders is a deflationary disaster that will be sure to spread to other markets.  My game plan assumptions are we get a low sometime before month end and then we rally for six weeks into September.  By then it will be apparent that the fundamental wheels are coming off and we get our Hindenburg Correction of 15% or greater.

I am operating under the assumption that we have seen the Bull Market Top in May.  I have been short since the Highs in April.  I am also of the belief that the crash potential is very real due to the unprecedented manipulation of the Bond and Stock markets in both Price and Time.  Picture in your mind a rubber band stretched to the max about to be snapped on your little brother’s leg.  You know it will make him cry.  Well I am afraid all of us will be crying soon.  This will sound insane but my ultimate target is below 2009 low.  Mother Nature will exact her revenge and expunge the excesses from the system.  I hope to God that I am wrong.

The omnipotence of Central Banks and the Era of Extend and Pretend is over.  China is showing desperation and so far losing the battle.  The ECB has lost Greece and the Euro is in doubt.

Semis are acting like death and missing numbers and the Trannies are telling us that something is off with the economy.  Guys the signs are here.

I leave you with this thought.  AAPL last quarter had 29% of their revenue come from China which was 70% y/y growth.  Do you think the Chinese Bull Market had something to do with this?  I hear the watch is a disaster and now iPhone numbers are way too high given the sudden wealth destruction in China.  APPLE under $121 is in a downtrend and so goes AAPL so goes the market.

 

 

 

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When this man came on the scene in January I sensed he was different.  How did I know that? Because he is an ALPHA MALE!  An Alpha Male is a leader of the pack.  Alphas protect and lead the pack.  They are selfless and that is why the pack follows them.  However, in todays society our idea of an Alpha Male is warped and often times wrong.  An Alpha Male is not a billionaire or a career politician.  Most of those types of people are selfish narcissists that don’t give a shit about anything but themselves and their own power.  Yanis is a reluctant leader who stepped forward with one simple thing on his mind:  How do I do what is best for my people?  

Yanis does not give a a rats ass what other people, especially the Troika, think of him.  He is focused on one thing and one thing only and that is how does he get a good deal for his suffering people.  If you watch this man in interviews he is comfortable in his own skin and never apologizes for his beliefs.  His genuine concern for the humanitarian tragedy in Greece was apparent to me from the beginning.  Such a man can not be bought, bribed, bullied or frightened.  The biggest mistake that the Troika made was in not realizing they were going against an Alpha Male.  They assumed that he was a lying, unprincipled, scumbag like themselves.  When scumbags go against Alphas they always lose.  In fact I contend that Christine Legarde of the IMF saw the writing on the wall and decided to speak the truth and release the report of the impossibility of Greece paying back their debts ever.  She saw a man sitting across the table from her that was unwavering and willing to lose his job based on principle.  She decided to break ranks and throw the rest of the Troika under the bus and try to save some face for her and the IMF.

We live in extraordinary times!  We are in a Global Crisis of confidence!  The Alphas are beginning to emerge onto the scene as the worlds current set of psychopathic leaders fall on their face.  The popularity of Donald Trump in the polls is a direct result of two things: he speaks the truth as he sees it and he does not lie.  Will other Alphas emerge onto the scene in the US elections? We shall see.

How does one spot an Alpha Male?

1) They don’t give a flying fuck what anyone thinks of them.  They are comfortable in their own skin.

2) The don’t lie (see point 1).

3) They don’t seek approval from anyone!

4) They are fearless.

5) They realize they can not control anything except how they react to situations.

6) Anyone demonized by the Media as an extremist is likely an Alpha Male.

Yanis is the first of what I believe are many new Alphas that will come forward.  The old power structures that reward cronyism, theft, corruption and lying are coming to an end.  However, this system will not go down without a fight.

Yanis is aware that the Greek people are just beginning their journey which will not be without pain and sacrifice but if he can reduce the debt they are halfway home to a new freedom.

Watch this interview from this weekend of an Alpha Male in action against the Press. Simply Brilliant!

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Something interesting happened this weekend.  It has taken me a few days to wrap my head around it but THE ERA OF EXTEND AND PRETEND is coming to an end.  As I have said earlier, Yanis and Tsipras are not about business as usual and the EU, ECB and the IMF have finally figured out that their blackmail no longer works.  The Greeks are unwilling to play this game any longer and want to restructure their debt which means banks and bond holders take a loss.  I think it is inevitable that there will be some form of debt relief.  I could be wrong but no one was expecting a referendum.

Yanis long ago realized that Greece is insolvent and that to continue with the extend and pretend bailout packages is insanity and also immoral.  While many of us sit comfortably behind our Bloomberg and TradeStation terminals, the human cost to Greece has been immense and tragic.  There are stories of children in the streets and mothers having to become prostitutes to put food on the table.  In January I saw this interview with Yanis and I knew that he was not going to compromise on debt haircuts if he could help it.

The choice is between admitting the Truth  of insolvency or continuing down the path of depression which inevitably leads to civil war or revolution.  It looks like Yanis and company are trying to shine the light upon the Truth this week.

The new news is the the Governor of Puerto Rico Alejandro Padilla has decided that the debts of his territory are no longer payable and he wants to declare bankruptcy and restructure his debt.  His timing was impeccable as he released this news upon the world Sunday night as Global markets were reeling from the Greek referendum news on Saturday.  I think Padilla is basically using the Greek situation as cover to admit the Truth that his people can not possibly service the debt.  We have arrived at the point in time of the credit cycle where the math no longer works.  The effect of constant bailouts and extend and pretend has basically through the magic of compounding made the debt for these two regimes no longer tenable.  The curious thing about Truth in the capital markets is that it is very contagious.  The question is do the creditors see this Truth?  Up until now the global credit markets have been lulled into a sense of complacency as the central banks have created the illusion of omnipotence. What many have failed to recognize is the human cost that has been imposed upon the people in these indebted regions.  You can only push folks so far before they say No More!  I suspect that the PR situation will quickly result in a widening of all muni spreads and begin the unpleasant process of putting pressure on essentially bankrupt states and municipalities in the US.

The Truth of the debt situation in Greece is what the Troika is trying to hide from the light of day.   Most of the bail out funds that have been given to Greece have actually bailed out the banks and hedge fund creditors in the form of interest and capital gains and very little has actually gone into the Greek economy.  In order to pay the creditors the people of Greece have had to become debt serfs under great austerity.  If Troika gives in to Greece the Truth of the insolvency for Italy, Spain and Portugal will become readily apparent to the capital markets and to the citizens in these countries who will also demand a deal like Greece should it get one.  So essentially when you hear Troika officials speaking of contagion they are really saying Truth.  So the EU, ECB and the IMF really hope that they can contain the Truth about the situation.

Credit spreads have been widening slowly since July of last year and they are beginning to widen at an accelerating rate lately.  If the Truth of Greece and PR begin to spread quickly in the minds of both debtors and creditors we could see a massive widening of credit spreads and a pause in the issuance of debt and a reflexive feedback loop that becomes vicious.  The reason why this matters to the stock market is simple: credit is the life blood of the equity bull market.  Without credit we will see corporate stock buy backs cease, company earnings collapse and system wide margin calls begin.  The establishment knows this and this is why Jack Lew our Treasury Secretary and now Obama (clearly someone told him what to say) have both urged that Greece and the Creditors hammer out a deal.  Jack Lew has even suggested that debt relief has to be part of the deal.  The dirty little secret of the asset bubble blown by the Fed is that it relies on confidence of market participants and once lost it is essentially over and liquidations begin.

The question is can this Extend and Pretend continue or is it too late because the Truth Genie is out of the bottle?  Will the Truth spread slowly or quickly like a fireball engulfing the Planet from an asteroid hit?  In 1929 the Great Depression was really caused not by the stock market crash but by the Sovereign Debt defaults of Europe.  I would contend that the math has stopped working and that the European power structure in place is desperately trying to hold on via propaganda and Police State brutality.  Truth is their enemy.  Unfortunately for them I think it is spreading quickly.  We should know over the next couple of months either way.

 

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Clearly the EU has acted like Alfred E. Neuman and completely miscalculated the Greeks.  As I wrote months ago our friend Yanis was a man to be watched.  If you listened to him he has always said that Greece has nothing to lose since they are insolvent.  He understood that to go down this path of continued bailouts was insanity.  The EU, IMF and ECB seem to have misjudged the Greeks and their resolve.  The Greeks really have no choice but to default given the Troika position of bleeding them dry.

Markets never top on Bad news.  I don’t expect a crash to commence on this news but I also don’t think we get a shallow dip either.  My best guess is that we bottom sometime in July and commence a rally that should be faded.  If the CB’s freak out here and employ bazooka intervention then all bets are off and I have no idea what happens.  They would be better served to draw in the shorts and then intervene.  I do think this is the beginning of the end.  We got a 5th Hindenburg Omen on Friday as well.  The crash window remains between now and October.  This will be a very tricky volatile market.

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Yesterday we got our 4th confirmed Hindenburg Omen signal with all the others occurring over the last two weeks.  We had a similar occurrence in September last year before the October swoon.  A Hindenburg Omen is not a timing tool nor does it mean a crash will happen.  It simply means that a correction of 15% or greater has a 25% chance of occurring over the next four months.  So the window is between July and October.  In fact all corrections of 15% or greater over the last 30 years save one have had an Omen signal precede the correction.  Stated another way the pre-conditions for a big correction or a crash have been met and the clock runs over the next 4 months.

Most of you know I am a bear and I have been positioned as one for many months.  I have margin ammo to add to my positions should I gather more confidence.  At the very least for you bulls this should serve as a heads up that the underlying market internals are not healthy.  My belief is that this is the most dangerous stock market we have ever seen since the inception of the Dow Jones Averages in 1876.  The Global Central Bank manipulation has extended this cycle 13 moths longer than the previous record of 60 month advances which occurred in the bull market tops of 1987 and 2007.  Cycles can be stretched but not denied and I would contend that manipulation makes the hang over that much worse. The market is having trouble here at its 161.8% Fibonacci extension form the 2007-2009 low.  The 161.8% Fibonacci level is the Golden Ratio in nature and I suggest the market will have a very difficult time making it through this level in addition to all the fundamental headwinds that are beginning to appear.

I am not recommending you short this market today as we could make marginal new ATH’s from here.  However, I think the risk reward is very skewed to the downside as we are now in the crash window and 13 months beyond the previous 4 year cycle advance record.  View this post today as a Public Service Announcement rather than a prediction or a recommendation.

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The Dollar has been taking some time off since March and consolidating the Monster move up from last May when it completed its 4 year cycle low.  I am pretty sure that we have seen the intermediate term bottom with maybe one more minor push down.  The dollar strength should act as a tightening mechanism for global credit and kick off another round of risk off in emerging market equities and debt.  I suspect the energy complex will get destroyed so I will be looking for shorts there.  The general equity market looks very tired and has technically very weak momentum.  I suspect more chop with a bias lower.  I have started a long dollar position yesterday and will add on weakness.  My longer term target for the DXY is 120.

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