The VIX is broken and other true classroom flubs and fluffs. I’m probably dating myself but that was a great comic strip when I was growing up in the New York newspapers in case you were wondering.
Last week several reputable stock market sources stated the VIX is a broken instrument. On the surface that appears to be true. But with some of these things you really have to dig below the surface to understand what it is telling us. I’m going to show you this chart and then you’ll realize how you really have to take the personalities on television with a big grain of salt. Okay, it’s time to tell the truth.
From November 2003 (the big red candle) when the VIX turned down for good last decade it began a streak of being mostly complacent for 38 months. Now from the peak of the bad old days of the Black Swan debt ceiling debacle of 2011 we are only down 34 months. If you really want to press the point from the acceleration of the complacency you look back to that red bar in June 2012 and from that point only 24 months have elapsed.
And the VIX doesn’t work anymore? If you really look at it that is a little premature. Seems to me that once the market peaked the VIX worked just fine. Perhaps too fine. If anything, you can see parallel eras from last decade to this one that just about proves according to market psychology we are already in a bubble. One of the characteristics of a bubble is psychology that says "this time it’s different." Sure it is. They don’t just come out and say it’s different verbatim. They speak in code language. For instance, after the market peaked in 2007 television pundits told us the market would be coming in for a soft landing. In 2011 after the Arab Spring and around the time of our Fibonacci/Gann perfect storm in May of that year the word was the economy had hit a ‘soft patch.’ Okay, so back in 1999 pundits told us it was a ‘new economy.’
They are not going to tell you it’s a new economy although it really is. It’s not exactly the kind of new economy we expected or could be proud of. After all, it’s only 7 months since the Fed started tapering. So how new could it be? This one is setting all-time records for mediocrity. The takeaway here is anytime the crowd attempts to twist or bend reality there’s a good chance a bubble is going on. This is a real case of delusion because all you need to do is look at the picture to realize we are not even close to the kind of flat VIX we had last time yet people have decided it’s a broken instrument. So what is the delusion? The delusion is what is coming down the pike. I can’t tell you when but the stock market responds to iron rules and sooner or later we are going to have some kind of a crisis that spikes it sky high. It probably will never spike like it did in 2008 but an elongated VIX like this is not broken, it’s a warning that longer it goes, the more intense will be the correction.
For my part, I’ve tried to help you. I put up time window after time window and the market doesn’t want to cooperate. Sooner or later some people might come to the conclusion that market cycles don’t work either anymore. Just about the time people think that way may be the time they get spanked. Iron Rule: 1 is markets ALWAYS revert to the mean. It might take some time but they always will.