I have good news and bad news. I know most of you will ask for the bad news first, so let’s get it out of the way. The VIX closed the week at 16.41. Really, no kidding! I wish I was making that up. How could we possibly be at a low after the market got crushed again and have the VIX reading be more representative of a top? Folks, something is not right about that. This kind of behavior is representative of not only a bear phase, but a bear market. Depending on the index you look at we are down over 2 months. In bull markets and little corrections the fear level tends to rise quickly. That’s why we keep moving higher. The SPX topped on September 14. On that date the VIX had a low of 13.51. In this whole process the highest level the VIX hit was 19.65 on October 23. I have to tell you, for a guy that’s been bullish the better part of the last 4 years, this isn’t good.
Earlier last week it looked like the constant drip, drip, drip by the media about the fiscal cliff was finally starting to wear on traders as the VIX hit a high of 18.64 on Thursday and looked like we could end the week near or above 20. That would have satisfied me given we are approaching the friendly holiday seasonal point. I still think we’ll get the Santa Claus rally but now I’m really concerned about what happens after the New Year.
So why did they drop it down? The bears covered watching Friday’s love fest featuring Boehner, Pelosi, Reid and Mitch McConnell. They were close to gushing and I thought they were going to sit down and play bridge. I happen to be in the camp they’ll come to a deal on this fiscal cliff business. These politicians might be stubborn but they are certainly not stupid. Last week the Philly Fed number was really bad. On Thursday the Philly Fed number was -10.7 as compared to 5.7 in October. This was attributed to the storm. The survey number indicates business activity in the region and below zero indicates contraction. We knew it had to be bad for all the reasons we’ve discussed here the past 2 weeks. Now we know for certain how badly business in the Northeast has been hurt. For the benefit of my friends down under and elsewhere in the corridor from Washington DC to Boston there is a population of 50 million people which used to be a 5th of the US population but now I think it’s about one sixth of the country. My heart goes out to my favorite city in the world however if there has to be a silver lining (there may always be a silver lining in any tragedy) it’s the fact that Congress might actually take this negotiation seriously. We already knew GDP was taking a hit from Sandy and now we are getting an indication in this Philly Fed number. These politicians not only have to come to a deal, but they have to come to some agreement so they don’t play Grinch with Christmas shopping season because the worst fears of the CBO will be realized early if the economy takes the double jeopardy hit of the storm and the cliff.
So give them credit for figuring that out. However, bears who have not quite figured out the long term cycles are favoring them, decided to emulate their euro equity bear cousins and cover on the potential of good news. But markets are incredibly perverse mechanisms. It might be that everyone is looking at the fiscal cliff but with a VIX down near the ditch I’m here to tell you that after holiday euphoria season even if they come to a deal, the market will find something else to upset it. You trade news events, you get burned. You trade on human psychology as represented by tried and true indicators, you do well. The market is not going to stage a big rally from these levels of sentiment. It’s just not going to happen.
You’ve heard that kind of talk before out of me the past 2 weeks and conditions have worked out very close to plan. I’m having a very tough time with this VIX. This kind of behavior is insane. It is and goes to show you that from time to time mass crowd psychology is entirely irrational. The bad news it could stay irrational longer than you have a trading account.
So what’s the good news? It is Thanksgiving and we are coming to the favorable seasonal point. AAPL is trying to find a low and that would help but it doesn’t help in the longer term when the media portrays this low as a generational low. Sorry, this is not Wal-Mart and AAPL doesn’t advertise the red light special. More than likely its setting up some intermediate term players for major disappointment down the road. If you are a short term player you might catch a very nice bounce for now. The other good news is the US Dollar hitting our 1.618 extension almost to the penny. The Greenback has reached the minimum requirement for an extension high. Since it backed off in the exact right spot we might have something to talk about. The other good news might be on the SOX which has hit our connect the dots attractor line which looked like it would hit in October but rallied straight up and came straight down. The SOX is at a place where it really can bounce.
Next page: Other bear market risk factors
So what can possibly create a real bear to manifest if the fiscal cliff is solved? Well, they have a situation brewing in the Middle East. Right now, it’s on the cusp of escalating although it does appear all sides; even Egypt is playing damage control. Then again, you never know what will happen because December is the time the whole world has been waiting on that Mayan calendar business. Let me just say I’m not an aficionado of the end of the world. I don’t buy any of it. Those of you who’ve been following my work know I don’t subscribe to any doomsday scenario. But we’ve heard about December 2012 for years and within a couple of months we did have that once in a lifetime storm hit the Northeast. I find it kind of strange. But let’s stick to our work. With a VIX as low as it is, this is developing into bear market psychology. In bear markets the surprises are always to the downside. I have no idea what is going to happen, I just don’t like what I see in terms of sentiment for the bigger picture.
So it’s a short week and might even be shorter given light volume. It’s the perfect week for a bounce. Finally, oil is sitting at an important inflection point and if you’ve noticed, with a skirmish in the Middle East, we have yet to see a rise in prices. What that means is traders are still fixated on the fiscal cliff. With the Chinese SSE sitting at a double bottom we also need to see support come in there if any bounce is to be sustainable.