This Market Feedback Loop Will Self-Destruct
Submitted by QTR's Fringe Finance
At some point, investors have to acknowledge what’s happening in this market. I don’t expect the rocket surgeons on CNBC to talk about it. Nor do I expect Jamie Dimon to write about it in his annual letter.
There’s a certain amount of kayfabe (hereinafter referred to as “lying to the public”) that makes up the top layer of public discourse about markets. It’s slick talk used to give the poors and commonfolk the impression things are operating totally normally even when they aren’t and when the aberrations have not shown up in the form of an easily identifiable shit show (i.e. massive crash) that everyone in the world is forced to acknowledge yet.
As I have started to pierce the veil about, this is obviously no longer a normal bull market driven by earnings growth, healthy economic expansion, or rational price discovery. We now have proof it is a market being mechanically forced higher by options flows, dealer hedging activity, and an AI-driven speculative frenzy that is beginning to resemble the most extreme periods of financial excess in modern history.
ZeroHedge highlighted the latest example after yesterday’s session, writing:
“Another massive gamma squeeze day as ‘spot up, vol up’: VIX soars on call buying as everyone rushes into the AI mania. Not even during the ‘Summer of 2020 SoftBank squeeze’ did we see such moves.”
“Thanks for the complex looking chart used by people smarter than me, Chris,” you’ll say to me. “I definitely, totally know what it means, but let me make sure that you do, too.”
Sure. What is means is this. Normally when stocks go up, the VIX (fear/volatility gauge) falls. This chart shows the unusual opposite—stocks are rising and VIX is staying high/rising because traders are aggressively buying call options on AI stocks, forcing market makers to buy more shares and helping drive a gamma squeeze higher.
In a normal market environment, rising stock prices tend to coincide with falling volatility. The rising VIX here likely suggests traders are also paying up for protection (or pricing in bigger future swings), which means the rally is being driven by speculative momentum but the market still sees elevated risk beneath the surface.
The VIX calculation — calculated from S&P 500 index option prices, specifically a wide range of out-of-the-money calls and puts that expire in roughly 23–37 days — uses both puts and calls, but historically VIX often rises when investors aggressively buy puts for downside protection.
As investors grow more confident (different from as stock prices move higher), demand for downside protection typically falls and the VIX moves lower. That relationship has historically been one of the market’s most reliable signals.
But that relationship is breaking down...(READ THIS FULL ANALYSIS 100% FREE HERE).