26 December 2013

SP 500 and NDX Futures Daily Charts - VIX - A Warning On the Equity Market

It is the end of year, and the market volume is light, almost as light as the regulatory oversight.

Stocks are drifting higher as the paint is lightly stroked across the tape. VIX is quite low and I have included a Year-To-Date look at it below for you to gauge it more effectively. That is not to say it cannot remain low for a period of time as we have seen in this market during the year. 

It is too bad the major VIX ETFs, and short stocks ETFs, are designed to lose money over any extended time period.  One will have to find some other way to seek safety or a contrarian event without trying to precisely time the market.  What that might turn out to be I can only say what I tend to think about it, having no crystal ball of my own, alas.

As you know I have said it looks like the Fed is blowing an asset bubble in financial assets, for the purposes of a 'trickle down' recovery. Since then some others, more renowned and less easily ignored like Jim Grant, have said the same thing. And I do believe it is absolutely true.

This policy choice, to which the 'scholar-gentry' are trying to accommodate themselves because it feels so good for their own situations, is going to have some consequences. I suspect those consequences are going to start showing up next year.

Confidence, once lost, is hard to regain. Sometimes those in power can be so effective in bullying others to their views, along with their choirs of careerist supporters, that they can take a bad trend much too far beyond the sustainable to a false equilibrium. This is what we have seen in both the tech stock bubble, and the collateralisation of housing related debt bubble. And the reversion from it comes unexpectedly and with some release of energy.

I am fairly persuaded that we will see the same thing again, sometime in the next two years. We will likely see a 'market break' to confirm this first, a small one in the new year and another in spring. This is difficult to time because of the Fed's blatant attempt in support of the markets.

What will precipitate it, what the particular 'trigger event' will be I cannot say, but I am sure that it will be the result of this horrible policy decision fostered by the Federal Reserve and the administration of making the rich richer, in the hopes of making all boats rise, or as Galbraith noted, 'feeding the sparrows with the hay that passes through the horse.'

Have a pleasant evening.