Yesterday's downside reversal in the S&P 500, coming on the heels of the FOMC minutes, combined with a cornucopia of Central Bankers taking to the microphones today, seems to have FINALLY jolted the complacency of the Equity Perma Bulls. The Complacency Index, my name for the Volatility Index or VIX, has jumped quite sharply as signs are beginning to emerge that yesterday's FOMC minutes have rattled those who have somehow been hypnotized into believing that Central Banks have a magic can filled with magic beans that magically make all problems go away into never, never land, never to be seen again except in the dark recesses of our imaginations.
Here is a look at the chart that has gotten the technicians extremely concerned....
The extent of the stock market rally that we have witnessed since the beginning of this year alone is proof in my mind that investors can be herded into unthinking behavior faster than the word, "oligoply" can roll off the tongue.
Let's be honest here, the entirety of the stock market rally has been fueled by hot money courtesy of the Federal Reserve's Electronic Printing Press. It began with it back in 2008 with QE1 and has continued ever since then. Yes I know some point to corporate profits and signs of improving growth but does anyone out there genuinely believe that this economy can withstand higher interest rates? If the growth is so solid and the path to recovery is so entrenched then why is the Fed still continuing to conjure $85 BILLION each month that it might have it injected into the economy. Come on already....
The current fiasco involving the so-called "sequestration" in Washington DC has served to remind the saner among us that the US government is on a path that can only be termed "madness". The projected deficit for this fiscal year is over $ONE TRILLION. In a deficit of this magnitude, talk of even slowing the rate of spending increases (Washington DC speak for a cut) has brought out all manner of apocalyptic doom scenarios. What idiocy is it that grips the mind of these people? They are intent on bankrupting the nation. Historians paint a picture of the Roman emperor Nero supposedly fiddling while ROME BURNED. The current crop of leaders has certainly nothing on him. Matter of fact, they make Nero look downright statesman-like by comparison.
Here is the VIX CHART. Notice the sharp spike higher. Keep in mind that the only reason it had spiked higer in late DEcember of last year was over fears involving the now infamous "fiscal cliff".
Gold finally had some upside movement off its worst levels as it is seeing a bit of a reprieve from the nearly nonstop selling that has hit it since it took out support at $1640 last week. My buddy John Brimelow's excellent "Gold Jottings" reports very good premiums being paid for Gold by Indian buyers overnight. Demand was strong in Asia for the physical metal.
While the bounce is welcome, it does not look particularly impressive at this point. I suspect that there are more guys looking to sell rallies right now as they were caught long in gold and did not get out during the initial break towards psychological support near $1550. As I stated in yesterday's missive, gold needs to get back above $1640 to spook any of the shorts except for the most weak of hands. A move through $1620 will get some of them nervous enough to be ready to exit but the sentiment seems to be to wait around to see if the rallies have any staying power before exiting.
Something worth noting here, the Yen had a sharp rally, lots of short covering, as it and the US Dollar still remain safe haven currencies for some unfathomable reason. That implies a sharply weaker Euro and that is exactly what we saw today so far. The Euro got kicked in the groin by risk aversion trade tied to losses in the stock markets. Heck, the long bond finally showed some signs of buying although considering the extent of the jump in the VIX, for it to have trouble holding onto gains above a full point, tells me that there are still an awful lot of guys who want no part of bonds. Perhaps the thinking is if the Fed is going to throttle back on the bond buying program, there is no particularly compelling reason to lock in yields at such ridiculously low levels.
Let's just close today's thoughts with this... for the better part of nearly two months we have seen a near consensus among traders/investors that the Fed policy, in combination with the ECB, the BOE and the BOJ, had guaranteed smooth sailing in stocks. That led to one way trading in equities and in some of the currencies with the return of TRENDING MARKETS. That is the environment that traders, especially hedge funds LOVE. They find it extremely difficult to trade herky, jerky markets that whipsaw them up and down. The hedge funds were happy; the Central Banks were even happier as they had successfully herded the speculators into the markets they wishes them to ply their leveraged one way bets. All was well with the world, until....
Yesterday's FOMC minutes have now injected uncertainty back into the minds of enough traders to return us to the wild up and down, nearly unpredictable movements of yesteryear. We'll have to watch these things very closely to see if this is the start of another new norm of more wild price swings or if we can return to the one way trades that marked the beginning of this year. Keep an eye on the Euro as it will give us some clues.... other than that, we are all trying to watch to discern what comes next. No one ever said this business was easy.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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