The Market Stubbornly Refuses To Believe A Crash May Be Coming: Here's Why

Tyler Durden's picture

The fabric of the market is showing signs of fracturing, as 9 years of declining policy rates and 6 years of QEs failed to kick-off growth, while, as Fasanara Capital's Francesco Filia notes, further easing has a visibly decreasing marginal effectiveness. It is end-of-cycle-type policymaking and market responsiveness and while some markets and sentiment reflect the concerns of a tail-risk-like collapse, stocks remain dissonant in the medium-term to the ongoing rioting against monetary activism and market manipulation by global Central Banks.

As we detailed previously, demand for short-term crash protection increased last week to record highs...

The CS Fear Barometer (which measures 3M sentiment) fell to near a 1-year low of 26%, suggesting constructive medium-term investor sentiment...

And the volatility of VIX is entirely unphased...

So, CS Fear Barometer and vol-of-vol do not show signs of panic and suggest market participants are not protecting for a crash.

Furthemore, S&P 500's 12% drop from top is "simply not enough" given the cross asset collapse around the world, Evercore ISI technical analyst Rich Ross said in note to clients today.

Credit markets, however, have started to suggest some notable concerns growing. As Goldman shows, even Investment grade credit has started to collapse...

Flashing a big warning for stocks in the last week...

And despite the record skews, the cost of downside tail-risk protection in stocks is still notably lower than in credit...

Credit Suisse explains:

Our desk has seen only short-term hedging.


Particularly interesting, insurance companies are buying puts that knockout down 20%.


These puts are cheaper because they go away at the point you may want it most. It suggests insurance companies think the market has 5-10% downside but are not worried about a 20%-plus crash.


The market does not believe there is a systemic pullback/crash coming, so if you are bullish, that's a datapoint to hold onto.

However, if this kind of cognitive dissonance makes you wnat to hedge even more, we remind readers of the stealthy way in which some market particpants are betting on a collapse in stocks... it appears many market participants are piling into par Eurodollar calls:

[the chart shows the cumulative open interest in par calls on eurodollar futures contracts that expire in 2016 and 2017 - basically options on short-term interest rates with a strike price of zero, such that they pay out if the Fed takes rates negative]

When queried whether this is indeed a trade to bet on a market drop, Michael Green responded as follows:

[A reader] thought  this might be an attempt by hedge funds to hedge out their exposure to rising interest rates very cheaply.


My initial idea was that it actually could be a bet on negative rates (if for some reason the Fed had to come back into the picture with QE4).


The bottom line: "Deep OTM puts on the S&P are very expensive while par ED calls are relatively cheap.  In my view, we are that inflection point where the Fed is going to start to waffle…the bear market beckons and they will not be able to stick with their interest rate guidance. Of course, markets tend to frown on Central Bankers revealed as less than omniscient..."

So in short: stock market participants remain convinced that long-lasting 'significant' downside is impossible (despite short-term 'small-drop' hedging), because they expect The Fed to save the world once again. That's why sentiment is extreme but positioning is not and the equity market is simply far from prepared for further (or lower for longers) downside.

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Chuckster's picture

I think the Chinese overproduced what the world could consume just like the Japanese did 25 years ago.  The USA has been running on fumes for 35 years.  Roll up your's too late to save your shoes.

johnvallo's picture
The market just needs to hit rock bottom: Denial Defined

Denial can be referred to as a refusal to admit the truth or reality. In psychology it refers to a type of defense mechanism where people subconsciously reject aspects of reality that they are not comfortable with. Those who are addicted to alcohol or drugs can have little insight into their own condition as a result of denial. Most people will experience at least some level of denial about things that make them uncomfortable, but the addict develops a more rigid type of denial that can be difficult to penetrate.

Denial as a Coping Mechanism

A defense mechanism is an unconscious psychological strategy that people use to help them cope with reality and protect their ego. The ability of the people to protect themselves in this way can be beneficial but sometimes a defense mechanism will prevent people from enjoying life. One of the most commonly used defense mechanisms is denial. Addicts who suffer from denial will refuse to acknowledge that they have a problem. When they do this they are not lying. Their denial can be so strong that they just can’t see that it is substance abuse that is their real problem.

The Benefits of Denial as a Coping Mechanism

Denial can be beneficial as a coping mechanism because it:

* Denial can give people a bit of time to adjust to a challenging life event.
* It can prevent people from making rash decisions.
* It can help to protect the ego from something that would cause a great deal of suffering.

Living in denial tends to always be a bad thing that leads to suffering. This is particularly true when people use denial as a means to continue abusing alcohol or drugs.

Justifications for Substance Abuse

The addict is a master at using denial to protect their substance abuse. They will be able to supply plenty of other justifications for why their life is mess such as:

* The real problem is other people judging them.
* Their family stresses them out so they need to unwind with alcohol and drugs.
* They have a job they hate and a boss who makes their life miserable.
* Life is so boring without alcohol or drugs.
* Their lack of employment opportunities it the real problem.
* People who do not do drink or do drugs are weird and uptight.
* The country is being ruined by the government and this is why their life is so miserable.
* The weather is to blame.
* The real problem is that they do not have a boyfriend/girlfriend.

The addict will be able to come up with plenty of justifications for their behavior. Their denial ensures that they will never consider the real source of their problems. It is only by seeing beyond their denial that that the individual gains insight into the reality of their situation.

Denial and Half-Truths

Addicts can be quite skilled at bracketing off parts of their reality to boost their denial. An alcoholic may be too ill to drink on a particular day, but later use this as evidence that they have control over their drinking. If they manage to go a whole week without alcohol they may use this to support the idea that they are not an alcoholic. They will ignore other aspects of their life that do not support their drinking or drugging. The addict will use these half-truths along with their denial as justification for continued substance abuse.

Denial and Hitting Rock Bottom

The usual way that addicts get beyond their denial is by hitting rock bottom. This means that things in their life get so bad that they are unable to ignore reality any longer. Hitting rock bottom provides a window of opportunity for the addict to seek help. If they fail to make the most of this insight they can easily slip back into denial.

Hitting rock bottom does not mean having to lose everything. Some addicts have a high rock bottom. It is like being a passenger on an elevator that is going down – it is up to each individual to decide where they want to get off. There is no advantage to riding the addiction all the way to the bottom because this can mean death. The sooner that the addict is able to see beyond their denial the better it will be for them.

Soul Glow's picture

Market turned again, heading back down.

Durrmockracy's picture
Durrmockracy (not verified) Soul Glow Jan 19, 2016 3:24 PM

Week 3 and this "market" can't even stage a dead cat bounce.

dead hobo's picture

Then again, some people are just stupid. Others are commissioned salesmen who troll for the gullible with money. Lots of people don't deserve this much consideration. They're not smart enough to be in denial, unless their financial adviser tells them to do it ... which will happen ... every time a new commission making idea comes along. 

Pdrum2's picture

Actually, "the country is being ruined by the government" and "there are a lack of job opportunites" are true and  legitimate excuses.

Cangaroo.TNT's picture

I wear birkencrocks: Birkenstocks inside of Crocs.  They're indestructible and impervious to everything.  And, they look great with jogging pants or a suit.

MrNosey's picture
MrNosey (not verified) Chuckster Jan 19, 2016 2:51 PM

The die is cast, there will be no real recovery what so ever!

The elite will soon run and hide in the bunkers paid for with citizens taxes, after engineering a full economic collapse as well as starting WW3, plus they will make sure that there are enough Jihadi's in the West to start a race war.

That should be enough to cover up the failed fiat ponzi scheme and take care of the 'excessive' population......

22winmag's picture

The shoes being U.S. colony Japan and economic quasi-colony China.

TrustbutVerify's picture

And essential to your comment - in each case the US lost millions of jobs because the US citizens who were losing their jobs bought the products that were causing the loss of their jobs.  

Kreditanstalt's picture

"...unFAZED..."!!!!   Too much relying on spellcheck...?

And gold should be at US$1500 under thiskind of credit stress but is suppressed.  Something weird is affecting "market participants"

Publicus_Reanimated's picture

It's not wierd, it's by design.  The people manipulating this market are every bit as smart as we are and then some.  They know as well as we do that you seek inflection points and exert pressure so the impact of your effort is magnified and influences events in the direction of your desired goal.  It's like war.  There is also disinformation.  Unless you are admitted into the club you don't get to see how it all fits together.  We do our best by aggregating intelligence.  Of course, we're being watched but who isn't these days?

One And Only's picture

Fasanara Capital's Francesco Filia 10 x fast

agstacks's picture

"I told you the stimulus wasn't big enough."


farmboy's picture

Makes sense to me. VIX is used by most so called quants to hedge against equity declines. Now we have one but their crazy proxy hedge is not working. That will increase their panic even more.

o r c k's picture

They expect the Fed to save the world once again? I'm looking, I'm looking.

khnum's picture

a crow will peck at roadkill with an oncoming car until the very last moment,sometimes they dont make it why,...greed

101 years and counting's picture

stocks crash when:

oversold (check)

no one is protected/hedges (check)

let it commence any day now.

HardlyZero's picture

Get out what stocks remain in 2016 (except some Silver and Gold).

August 2015 was the strong hint.

DirkDiggler11's picture

I would agree, but even with the underlying metals up in price today, the miners are getting hammered yet again, both the GDX and GDXJ are down over 4.5 % today as are every one of my 11 mining stocks. The miners have been getting hammered 2X the fall in the overall S&P 500. Fuck me, glad I allocated most of my funds to stacking the phyz...

Early Retirement's picture
Early Retirement (not verified) Jan 19, 2016 2:50 PM

When David Tepper got out, a Jew so rich he pays himself a $2 billion salary every year (please stop and think about that), connected to every Jew on the Fed, then perhaps that was the signal to get out. I do thank Mr. Tepper for having the decency to tell us goy he had just gotten out.

SuperRay's picture

He must not be a member of the goyim defamation league

RiverRoad's picture

The big hedge fund that dumped last August was the canary in the coal mine.

Mini-Me's picture

How long can Yellen hold out?  Her beloved wealth effect is vanishing before her eyes.  

That sound you hear is QE4 knocking on the door.

SuperRay's picture

Hold out? They put her away in a closet. When the time comes they'll take her out, wind her up and set her loose to waddle to the next meeting.

22winmag's picture

Reading stuff like this makes me think of doubling down on my food-nutrition stacks.


I already have enough booze and ammo to face any adversity.

DirkDiggler11's picture

More sardines Winmag? The stray cats in your neighborhood may start to encircle your fortress...

22winmag's picture

I invest in cases of corned beef, turkey, salmon, herring, and other canned foods.


Call me diversified.

zeroaccountability's picture
zeroaccountability (not verified) 22winmag Jan 19, 2016 6:09 PM

Sardines can double as fish-bait.

franzpick's picture

Downside leader RUT sees the crash coming, to the next bear market lower low minus another 5-10%:

css1971's picture

Doesn't have to crash. It could just be 3 years of down.

22winmag's picture



One year and a day.

SuperRay's picture

Right. Everything will change on 1-21-17...

gatorengineer's picture

exactly, unless there is a catalyzing event like a hedgie blowing up or major commodity guy puking this could be a gradual crumble over years.  Shipping companies have to be straining.

USSLiberty's picture

Waiting on the 3PM rip...3,2,1.

USSLiberty's picture

What happened PPT? That was more like a puff.

Sudden Debt's picture

Well, there's 2 things you'll hear in the comming weeks.

1. Decrease of margins with increased costs.

Not exactly what a speculator wants to hear.

2. Metals industry and construction have been crashing for over 7 months now globally.

And that means the service sector is now feeling the punch for over 1 to 2 months now.


So you can take your pick. We'll keep sliding down for another 4 months like we did this year and then crash.

Or get the fuck out of dodge and go cash.


DirkDiggler11's picture

No crash coming, just an unrelenting grind lower, day after day after day with the markets in the red.... Then the fucker will crash when people think the market has already sold off enough.

SuperRay's picture

Gee, I have no idea what's going to happen. If I did I'd be on my own private island by now

Turquoise5's picture

The most interesting scenario to me is the one in which the Fed does, indeed, continue hiking interest rates. After all, the 10 year Treasury has not even budged, giving Yellen and friends ammo to keep jacking with it until it rises. Plus, they gave almost 2 years warning for everyone to get out of the equities pool. So, if everyone stays in, thinking the Fed was not serious--as cautious as the Fed was in giving fair warning-- then, they deserve the losses they have coming. Funny thing is, the equity addicts will be still in denial the second time the Fed hikes, because they will rationalize that the Fed only did it to seem credible. Meanwhile, I have read a number of articles where the big banks are calling for a bear and/or hedging/ positioning accordingly. That will leave hedge funds, ins companies, pension funds, etc to take it on the chin. Also, the shorters have been burned so many times before, they are unlikely to place outsized bets to the down side.. This would be the max pain scenario all around, and, thus the one I think will be most likely.

Son of Captain Nemo's picture

I pray to God!

That all the bankers... All the lawyers that protect those bankers... All the investors who kept "eatin" when they knew and understood 8 years ago that the ride would be both brief and fatal...

Will all assemble in Manhattan, London, Tel Aviv, Rome Paris, Frankfurt, Zurich, Riyadh... and in orderly fashion climb the tallest building(s) in each of those jursidiction(s) and give "the plebian" the ultimate show of carnage they will never forget!..

All kidding aside.  I'm pretty sure "nail guns" or Smith & Wesson revolvers are on the verge of selling like hotcakes in each of these categories of individuals as the crescendo of bad news continues to increase in volume!


Flankspeed60's picture

Nah. Only people with a conscience and a willingness to admit failure are inclined to snuff themselves. The people you want will require a forced walk to the guillotines. You line 'em up and I'll provide the hardware and cleaning system.

besnook's picture

it still loooks like a run of the mill inventory recession, maybe a 3 month shutdown to catch up. in view of that, the intricacies of finance and theft(rehypothefication) limits the view of counterparty risk. where is the threshold that sets off a cascade of liquidity demand?

NEOSERF's picture

Love that the IMF only has China and Spain with lower expectations this year than last in terms of GDP growth....Russia gets quite a bit better meaning the juice in this forecast is oil returning to $85?