VIX Rising but still no worries (Yet)

The Volatility Index or VIX, is a useful index for measuring investor/trader sentiment in regards to the broader stock market's health. It reflects option premiums and is therefore a decent way of peering into the thinking of those who write the things and what they are expecting/fearing in the immediate future. As with any market index, it has its shortcomings but all in all, it is remains a good gauge of sentiment.

While the following chart is not scientific it is helpful in understanding the impact of the Federal Reserve's monetary strategies over the past few years.  I prefer to look at this chart as a demonstration of official monetary sector meddling into the affairs of capitalism/free markets.

In simple terms, the lower the index moves, the less fear or concern option writers and thus investors in general have towards the health of the US stock markets. When the index is rising, it reflects unease/discomfort/fear in those degrees.

Note how sharp spikes upward have been accompanied by expectations of the ending of previously announced and implemented rounds of Quantitative Easing. You can see the first of these spikes back in April 2010 when QE1 was coming to an end. It was not long after that the Fed announced the next round of QE, this one involving outright purchases of Treasury bonds. That was good for another outbreak of "DON'T WORRY- BE HAPPYitis" among the Wall Street crowd.

Of course, once that virus ran its course and QE2 expired in the summer of 2011, back came the awful realities of the gargantuan mountain of indebtedness overhanging the US economy. Even with those artificially induced lower long term interest rates, those stubborn consumers were not spending fast enough to offset the proliferation of bad debts, foreclosures and delinquencies. Throw on top of that massive problems in the Eurozone and investors actually seemed to awaken from their drunken stupor of indifference long enough to begin worrying.

"Tsk, Tsk' said the Central planners and out came the European Stability Mechanism in conjunction with the Fed's "Operation Twist" (the sale of maturing shorter dated debt in exchange for the equivalent amount of longer dated debt) and PRESTO! - ALL WORRIES GONE. "I CAN SEE CLEARLY NOW, THE RAIN IS GONE. I CAN SEE ALL OBSTACLES IN MY WAY.... IT'S GONNA BE A BRIGHT, BRIGHT, BRIGHT SUNSHINY DAY".

Down falls the fear level among investors as the injection of drugs courses through their veins. Greece however flared up again, as did Portugal, as did Spain and others in the Euro Zone and that produced a fleeting burst of anxiety/concern among investors early this year. With the ECB and the Eurozone ministers working feverishly to calm worried markets, it did not take long before all was well once again.

Now, as we have entered the final quarter of this year, the Fed has announced another round of QE (QE3), this time consisting of the purchase of $40 billion per month of Mortgage Backed Securities. It is odd, considering the reaction of the market to past pronouncements from the Fed, that the VIX actually spiked a bit higher instead of sinking even further on the news.

The index did move lower however in October when proof of the actual buys under this latest round of QE were evident. However, it should be noted that the index is beginning to rise again.

This is rather noteworthy to me as a trader/chartist. If this was a commodity, I would be looking to buy it based on the chart pattern. It has failed to make new lows and instead has a mini uptrend occurring since August of this year. Could it be that the Fed's QE's are beginning to lose their luster on the markets? Are the amounts considered to be insufficient by the broader market? Or is it perhaps the current "fiscal cliff" talks which are overwhelming trader sentiment in general? Either way, something has this market a bit nervous when compared to the recent degreeof complacency that we have witnessed in response to recent Fed announcements.

This leads me to believe, based on the analysis by Goldman last week and the comments from some current Federal Reserve governors, that another round of QE (QE4) is forthcoming. The Fed is simply not getting enough bang for their buck from QE round 3.

There are a couple of other factors at work here also. Many in the investment class are worried about tax hikes coming next year. Combine that with concerns about taxes on dividends nearly tripling and a spike in capital gains taxes and some investors are cashing out now before the Obama regime's grab of more money commences. Throw in further uncertainty about the impact of Obamacare on business and further regulatory burdens, and a growing number of investors are cashing in before 2012 ends. Clearly nervousness is rising meaning that the Fed is not only now fighting the deflationary forces arising from excessive debt levels but it is also fighting the results from the recent election.

At this point, based on the charts, it looks to me like some market participants are bracing for another fall back into recession in the US. Look at the chart of the Ten Year Treasury Note Yield. It is basically flatlining.