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Guest Post: Do We Get a Year-End Rally Or Not? Santa Dukes It Out With Mr. VIX

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

Do We Get a Year-End Rally Or Not? Santa Dukes It Out With Mr. VIX

Market cheerleaders see a rally coming; Mr. VIX is issuing a sell signal. Looks like the next few days will be a grudge match between Santa and Mr. VIX.

Everybody wants a Santa rally in stocks: Wall Street, the financial media cheerleaders, mutal fund managers, politicos, pump-and-dumpers, retail investors, gamblers, grifters and even Mrs. Santa all want a year-end stock market rally.

Santa's willing, but he's going to have to get past Mr. VIX.

The VIX volatility index is a remarkably accurate indicator of market highs and lows. You can see how well extremes in the VIX line up with highs and lows in the S&P 500 in the charts below.

I've marked the "Highs/Sells" in red lines and the "Lows/Buys" in black lines.

As you can see, Mr. VIX isn't signaling a big fat buy here--he's signaling a big fat sell. The general idea with Mr. VIX is that when investors are panicky and bearish, then they buy hedges against further declines, and this spikes the VIX up. If the VIX breaches the upper Bollinger Band, that aligns rather closely with the stock market lows.

If complacency is high and few investors feel much need to hedge against declines, then the VIX drops to the lower Bollinger Band. That generally aligns with market tops.

The VIX just plummeted below 25. The last time it fell below 25, the market reversed and sold off hard. Bulls expecting Santa to deliver a rally come heck or high water have to explain why the VIX is no longer relevant, and what looks like a strong VIX sell signal is actually a monster-buy signal.

Note the giant wedge pattern that suggests a major move in whichever direction price breaks decisively out of the wedge. Also note the support/resistance around the round number 1,200. Interestingly, the lower line of the wedge (the lower trend line) aligns rather closely with the 1,200 area of support/resistance.

To ignore the VIX sell signal, Bulls have to make the case that the global economy is so rock-solid that continued complacency and a reduction in volatility are to be expected.

Uh, right. Is the global economy rock-solid? (If you don't think the U.S. markets are correlated to global issues, just look at copper and the S&P 500. Copper leads, and the U.S. market follows. Ditto with the euro.) Is a sudden decline in volatility really reflecting global realities, or is it merely wishful thinking?

I've also tossed in a chart of the McClellan Oscillator, another tool for identifying buys (lows) and sells (highs) in the stock market. When this indicator plunges to its lows, that typically aligns with stock market lows/buys, and when it reaches peaks, those typically align with market tops/sells.

 

There are no perfect indicators, but there is a visible correlation between market tops and bottoms and Mr. VIX and the McClellan Oscillator. The problem for Santa is the McClellan Oscillator isn't exactly offering up a screaming buy signal, either.

Maybe Santa delivers a one-two punch to Mr. VIX and serves up a piping hot year-end rally as volatility falls off a cliff. Hey, anything's possible, especially if the referee is on the take.

 

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Fri, 12/16/2011 - 13:39 | 1987365 bnbdnb
bnbdnb's picture

VIX lags.

Fri, 12/16/2011 - 13:52 | 1987416 Popo
Popo's picture

True.  But there's a far, far more powerful force than volitility when it comes to holiday markets (particularly, right now):    Vacation.

No one is staying long over the holidays.   Yes, it's a low volume period that's easy to manipulate -- but still -- no one wants to worry about markets over the holidays.

People will trade this for another couple days (maybe) but they'll all be out soon enough -- maybe even today.

Fri, 12/16/2011 - 14:30 | 1987595 Randall Cabot
Randall Cabot's picture

People? Who are these people?

Fri, 12/16/2011 - 14:47 | 1987650 collon88
collon88's picture

Great point!  I think it has been posted here that 70% of trades are by HFT bots. OMG, are bots becoming self aware and becoming people too?

Sat, 12/17/2011 - 10:28 | 1989715 Manthong
Manthong's picture

"anything's possible, especially if the referee is on the take"

Very good post. The thing that troubles me is that knowing the Fed had this little $7 trillion unpublicized "policy" action, you can't invest or trade anything in the racket formerly known as the market.

Then again, maybe the only sure investment is fear.

 

Fri, 12/16/2011 - 17:43 | 1988322 Grinder74
Grinder74's picture

"... I've been waiting for you. You have many questions, and although the process has altered your consciousness, you remain irrevocably human. Ergo, some of my answers you will understand, and some of them you will not. Concordantly, while your first question may be the most pertinent, you may or may not realize it is also the most irrelevant."

Fri, 12/16/2011 - 20:45 | 1988945 EFNuttin
EFNuttin's picture

How many freakin' times did Colonel Sanders say "ergo" in that goofy monologue? If you see the Anomaly, say hello for me.

Fri, 12/16/2011 - 14:46 | 1987644 redux2redux
redux2redux's picture

Here is a Fast Money CNBC article about 'Exhausted money managers' cashing out, with the 'rationale' that this will cause the S&P to rise...

 

http://www.cnbc.com/id/45699245

Fri, 12/16/2011 - 14:50 | 1987651 SheepDog-One
SheepDog-One's picture

Theyve got no actual buyers. Everyone I know who trades says theyre out of stocks for the long haul.

Money managers exhausted? 

How about John and Jane america, bankrupt, foreclosed on, in debt up to their eyeballs, how are they holding up I wonder?

Fri, 12/16/2011 - 15:50 | 1987884 FreedomGuy
FreedomGuy's picture

I am not expert in these charts but as I understand them they essentially track market sentiment...human behavior. Inasmuch as things remain in pattern they are predictive.

Could I suggest that the market trades on government news which can seeminly validate the chart or invalidate. Neither is actually correct. Change the news, e.g., Successful Eurozone bailout, USA balances budget, German Banks Fail, etc. and the market will turn on a dime.

Fri, 12/16/2011 - 14:01 | 1987460 machineh
machineh's picture

Also, despite ongoing legitimate worries, VIX is printing a pattern of declining peaks.

It's just tough to keep fear at a fever pitch for months on end.

Smith's analysis is not convincing. I have seen trading systems in which VIX demonstrably added value. But these impressionistic charts provide no such evidence. SHOW ME THE TRADE STATS!

Fri, 12/16/2011 - 16:59 | 1988153 gringo28
gringo28's picture

jesh. and this guy apparently thinks it's not all priced in to boot. not saying there's a rocket ship waiting to take off but to go short the ES is kind of dumb at this point.

Fri, 12/16/2011 - 13:39 | 1987366 Captain Kink
Captain Kink's picture

All I want for Xmas is my two front teeth.

And a bottle of single malt.

Fri, 12/16/2011 - 13:51 | 1987417 Waterfallsparkles
Waterfallsparkles's picture

Hey, when you are over 65 that may be a really good wish.  A set of Dentures with mini inplants run around $35,000.

Or two implants for your front teeth would run you about $10,000.  Yes, after you pay for just two teeth you need a bottle of single malt.

Fri, 12/16/2011 - 14:58 | 1987677 Randall Cabot
Randall Cabot's picture

Oh yeah!!!

Fri, 12/16/2011 - 13:41 | 1987371 ZDRuX
ZDRuX's picture

Be weary of some form of QE sometime next year, either from the FED or the ECB. The market might swing up after all when Ben uses his heli to shower everyone with confetti.

Fri, 12/16/2011 - 13:42 | 1987378 transaccountin
transaccountin's picture

Santa rally, rofl. So many people trapped above /es 1250 praying, hoping for a miracle. Where's the fiat going to come from? Theres no printing going on. Once these druggies realize no fix coming, watch the crash!

Fri, 12/16/2011 - 13:49 | 1987409 transaccountin
transaccountin's picture

Wow check out the 10 and 30 year! There will be a downgrade of France over the weekend.

Fri, 12/16/2011 - 14:46 | 1987646 SheepDog-One
SheepDog-One's picture

Nothing worse than a rock bottom junkie denied his free fix!  Trainspotting!

Fri, 12/16/2011 - 13:45 | 1987392 sabra1
sabra1's picture

i remember when i was a little investor with a cold. my momma would rub vix vapo rub all over my hairy chest. thanx momma.

Fri, 12/16/2011 - 14:20 | 1987400 Dr. Engali
Dr. Engali's picture

I always peel off positions when the vix gets int the low volatility  " buy zone" that CNBC loves.  Let the dumb money have my shares.

Fri, 12/16/2011 - 13:47 | 1987402 Aunty Christ
Aunty Christ's picture

VIX below 25 doesn't mean shit. Below 15, go full monty short

Fri, 12/16/2011 - 13:47 | 1987403 Richard Chesler
Richard Chesler's picture

Fuck Wall Street and their shills!

 

Here comes Santa Crash,

Here comes Santa Crash,

Right down Santa Crash Lane,

VIXen and OGzen and all his fear

Fri, 12/16/2011 - 13:49 | 1987410 Stax Edwards
Stax Edwards's picture

The congressional testimony yesterday was sobering.  Did anyone catch fellow ZHer Snakeeyes testify?

His colleauge asserted that Greece should default by February.  I am going to have to keep some powder dry for when the EU sovereign defaults begin. 

The experts testified that Greece should default by February, and they expect after that things will get kind of dicey.

Fri, 12/16/2011 - 15:13 | 1987745 Apocalicious
Apocalicious's picture

Stax, check out the OI in the Feb 55 VIX calls. I spoke to the floor when that order printed, and it was a single buyer. A particular buyer who's traded directional VIX almost flawlessly in the past.

Fri, 12/16/2011 - 13:57 | 1987442 TradingJoe
TradingJoe's picture

The Fat Guy Will Have To Show Up Or...Else?! :)))

Fri, 12/16/2011 - 14:10 | 1987512 omi
omi's picture

>>>To ignore the VIX sell signal, Bulls have to make the case that the global economy is so rock-solid that continued complacency and a reduction in volatility are to be expected.

 

To buy something, you have to detect there is a flood of purchases at a good support. Other than long-term (ie, check the trade once a month, hoping to make 5% per year) maco news doesn't contribute much to shorter term trading as people simply trade from the charts.

 


Fri, 12/16/2011 - 14:16 | 1987538 catch edge ghost
catch edge ghost's picture

You got to pick up every stitch.
Rabbits running in the ditch.
Beatniks out to make it rich.

OHNO..

Fri, 12/16/2011 - 14:26 | 1987581 Mark Carney
Mark Carney's picture

not just the US10 year, but the canadian 10 year is 1.84%!!!! yikes what's up?

Fri, 12/16/2011 - 14:42 | 1987630 Georgesblog
Georgesblog's picture

Decorations and window dressing a rally do not make. Sentiment doesn't either. "Sorry, son. We can't afford a lump of coal, and we have to sell one of your socks."

http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/

Fri, 12/16/2011 - 14:44 | 1987638 SheepDog-One
SheepDog-One's picture

VIX is irrelevant in a dead empty broken marketplace.

 

Fri, 12/16/2011 - 16:07 | 1987958 ActionFive
ActionFive's picture

VIX is one of their perception tools-managed

Fri, 12/16/2011 - 14:53 | 1987660 SheepDog-One
SheepDog-One's picture

If they do stage some kind of Santa Rally, it will be a zero volume vapor melt up to be sold immediately. This market is fucked, lost any crediblity it ever had as nothing but a rigged corrupt casino. And now the shills demand 'confidence be restored'? Dream on.

Fri, 12/16/2011 - 15:05 | 1987703 Randall Cabot
Randall Cabot's picture

I suspect that the manipulators will ramp it today so that the sound bites the lemmings will hear this weekend will put them in a holly jolly good spending mood, and next week too-but I'm usually wrong.

Fri, 12/16/2011 - 15:11 | 1987730 Apocalicious
Apocalicious's picture

Someone recently bought an assload of Feb 55 calls in the VIX (they were buys, got color from the floor). This particular buyer has done a pretty good job of playing directional VIX bets in the past. When does a ton of that Euro sov debt come due? Hmm, if it can't be rolled...

Fri, 12/16/2011 - 15:19 | 1987760 bigdumbnugly
bigdumbnugly's picture

tale of the tape:

in this corner is the challenger VIX.  hungry, up and coming - and coming on even stronger in the last months.   V shaped torso.   devastating right uppercut to suckers.    prediction:  pain.

in this corner is the aging champ Santa Rally.   almost didn't even get up off the stool the last few rounds.   limping into the end of the year with bad knuckles, glass jaw, and maybe even dealing with a slight concussion or two.   necessarily carried by excellent cut men in his corner.  has all those wily old veteran tricks up his sleeve but the wheezing emanating from the pear shaped and worn out body is disconcerting.   might need the brown bottle to get by.

 

Fri, 12/16/2011 - 15:28 | 1987804 I got the Bull ...
I got the Bull by The Horns - HELP's picture

After lurking in all other sites such as ZH (Seeking Alpha, Market Watch, Business Insider, Azizonomics etc) I conclude that a lot of disaffected (The lost their savings gambling the markets) people are venting their spleen on these sites, but still have no idea.

 

Because the market is now centrally planned by the BIS and its Henchmen, the Central Banks, it is impossible to use history as a guide, and charts for that matter. The top houses and traders have read all the books, most new traders have, and as a result they (and their algos) know how to shake out Retail, and even wholesale traders.

Most of the bears are probably paid shills to strike fear in peoples hearts, forcing them to liquidate their underwater holdings.

People forget that money equals a commodity to exchange it for. With all this liquidity and money printing, the dollars will be winding up in the hands of people who are snapping up hard commodities, before the owners realise that the money is devalued.

For this reason I have gone to Cash (To buy items at deflated desperate prices) and prime farmland (to earn income from people who have to eat). In Australia you can only own guns if you have a farm or  member of a sporting shooter association. I bet eventually the sporting shooters will lose their right, but farmers will have a genuine reason (Stock shootings, vermin shootings and pest control) IF the SHTFH (Hard-causing a fine gut wrenching spray) at least I know I will be able to defend my interests. (My great Grandfather and Great Grandmother on both sides were burned alive in their home in Ukraine WW2 and I am learning from history)

BTW I have contacts in Australian Real Estate, in prime areas of Melbourne, and the market has dropped 40% in price offers but vendors are not selling. Once they are forced to sell (unemployment or panic), they will be underwater big time. In Australia, we have full recourse loans, so consumer spending is going to take a dive. Short Australian Banks and Retail. Australian Banks have heavily relied on offshore financing of Mortgages, and their funding costs are huge. I used to work in the Big 4 banks and their IT systems are inadequate for them to report quickly and efficiently.

Fri, 12/16/2011 - 15:28 | 1987805 I got the Bull ...
I got the Bull by The Horns - HELP's picture

After lurking in all other sites such as ZH (Seeking Alpha, Market Watch, Business Insider, Azizonomics etc) I conclude that a lot of disaffected (The lost their savings gambling the markets) people are venting their spleen on these sites, but still have no idea.

 

Because the market is now centrally planned by the BIS and its Henchmen, the Central Banks, it is impossible to use history as a guide, and charts for that matter. The top houses and traders have read all the books, most new traders have, and as a result they (and their algos) know how to shake out Retail, and even wholesale traders.

Most of the bears are probably paid shills to strike fear in peoples hearts, forcing them to liquidate their underwater holdings.

People forget that money equals a commodity to exchange it for. With all this liquidity and money printing, the dollars will be winding up in the hands of people who are snapping up hard commodities, before the owners realise that the money is devalued.

For this reason I have gone to Cash (To buy items at deflated desperate prices) and prime farmland (to earn income from people who have to eat). In Australia you can only own guns if you have a farm or  member of a sporting shooter association. I bet eventually the sporting shooters will lose their right, but farmers will have a genuine reason (Stock shootings, vermin shootings and pest control) IF the SHTFH (Hard-causing a fine gut wrenching spray) at least I know I will be able to defend my interests. (My great Grandfather and Great Grandmother on both sides were burned alive in their home in Ukraine WW2 and I am learning from history)

BTW I have contacts in Australian Real Estate, in prime areas of Melbourne, and the market has dropped 40% in price offers but vendors are not selling. Once they are forced to sell (unemployment or panic), they will be underwater big time. In Australia, we have full recourse loans, so consumer spending is going to take a dive. Short Australian Banks and Retail. Australian Banks have heavily relied on offshore financing of Mortgages, and their funding costs are huge. I used to work in the Big 4 banks and their IT systems are inadequate for them to report quickly and efficiently.

Fri, 12/16/2011 - 15:57 | 1987909 earleflorida
earleflorida's picture

what happened to all the chinese buyers?

Fri, 12/16/2011 - 15:56 | 1987903 LawsofPhysics
LawsofPhysics's picture

LOL! Since when has any sort of technical data mattered?

Fri, 12/16/2011 - 16:52 | 1988126 xela2200
xela2200's picture

So the question is --> How much of their clients' money are Money Managers willing to waste in order to prop up the market enough to get their bonuses?

Fri, 12/16/2011 - 17:12 | 1988194 Fuh Querada
Fuh Querada's picture

PLEASE ! PLEASE !! No more charts with retrospective buy and sell signals.

Do NOT follow this link or you will be banned from the site!