Last week I showed you how and why the CBOE Volatility Index (VIX) still works. You know that popular delusion now suggests the VIX is a broken indicator. I’m afraid that’s not true and if you take a serious look at the world around you, the VIX just so happens to work better than it ever has.
To most the VIX is an indicator of complacency or fear. Statistically it’s supposed to describe what a bunch of options traders are doing. If you are interested read “Leveraging the VIX to spot trend changes,” Futures March 2013.
I went through my own archives and found I’ve had quite a bit to say about the VIX in the past year and a half. One would wonder if I have anything new to say about it. In fact I do. Not only is the VIX not broken but it’s an incredible indicator of social mood and I’m here to tell you it’s an indication of a new complacency that is very dangerous to our way of life.
You know I’m not one of those doom and gloomers that are hiding under every nook and cranny on the Internet. Long time readers of this column know I’ve been mostly bullish the past five years. When the time came to be bearish in 2011 there were many who thought the stock market would take out the 2009 lows. I was not one of them. But here’s what I have to tell you. The situation in Syria/Iraq is a serious threat to our way of life and not many people seem overly concerned about it. How is it that a group too radical even for Al Qaeda caught us by surprise two weeks ago and continues to make progress without the West answering back? There is historical precedent for this. All you need to do is go back to the 1930’s to see what kind of damage complacency can cause.
Last year I told you there would be incalculable consequences to the president not following through on his line in the sand in Syria. Look, nobody wants a war but since that time we’ve seen at least one major geopolitical crisis develop in the Ukraine and another one metastasizing in Iraq even as I write this. Have you seen the pictures of unfortunate victims getting crucified in a return to the dark ages? What are we doing about it? I’ve heard three retired generals in the past four days suggest the new terrorist state being created by ISIS will end up being a breeding ground for embryonic terrorists who will look to create all kinds of mayhem inside the continental United States within a year. They pose no threat now but wait until they consolidate their gains.
So what does this have to do with our work here? Well, first of all it proves the VIX works just fine. Then if we don’t snap out of this funk its possible there could be a wakeup call someday bigger than that of 9/11. Most of you remember what happened to the stock market after 9/11. What I’m really saying is there will come a day after all these months of VIX complacency where it’s going to spike straight to the moon and I don’t think 1 out of 100 people on Wall Street is thinking about it. I really work at staying away from financial astrology but it’s not lost on me this market had a correction working and it abruptly ended on April 15 right on the first blood moon. Maybe it’s just a coincidence but I tend to doubt it. There are going to be three more such blood moons coming. NASA is concerned as they call this a tetrad which is four consecutive total lunar eclipses in a row. There have only been a handful of them in the last thousand years. I don’t want to hit you over the head with this but the next one hits on October 7-8 and that just so happens to be right on the 12th anniversary of the end of the Internet bear and the 7th anniversary of the 2007 top. As you know we take market timing very seriously around here. What I’m trying to say is September tends to be the statistically worst month of the year and we’ve seen major pivots form in October. As you know 2014 is turning out to be the year of the geopolitical surprise. Why is it a surprise? Because the VIX is so low.