Happy New Year?

The S&P 500 is up over 10% for the year (well…if it closes above 2248.33.) Is it time to break out the champagne and party hats?  We’ll take a look at how stocks got to where they are, and what to expect in the coming year.

The Ascendency of VIX

One of the biggest developments this past year was central banks’ perfection of VIX as a tool to drive stocks higher.  Long considered a good indicator of risk in the markets, VIX is now being used as a tool to ignite momentum-driven algos that push stocks higher.

Those of us who follow VIX closely have seen this coming for a while.  Even Main Street analysts have noticed the VIX-smashing that frequently occurs in the last hour — or, even minutes — of trading.  But, 2016 saw TPTB take it to a whole new level — with major losses averted by timely, trend-changing collapses in VIX.

In addition to a well-crafted falling channel (below, in white), VIX’s chart illustrates two major trend breaks (the white arrows.) 2016-12-30-vix-2016

The first occurred on Mar 16, when VIX gapped below a 7-month rising trend line to help establish a new falling channel.  It might now have seemed that significant at the time.  But, it helped SPX break out past major hurdles: a trend line off its Dec 2015, pre-Fed hike highs, and the 200-day moving average.  Instead of continuing lower, SPX’s rally continued up to its 2015 highs, eventually topping them.2016-12-30-spx-mar-15-2016

The second incident occurred in the wake of the US election.  VIX had climbed steadily from 12.73 to 23.01 in the days leading up to the election.  On election night, however, as it became apparent that Trump was going to win, futures began a massive sell-off (124 points, or 5.7%.)2016-12-30-es-election-results

Instead of spiking higher to reflect that panic, VIX suddenly collapsed — the very opposite of what should have happened.  Honestly, I mean, who panic-sells VIX in the midst of a 5.7% bloodbath in equity futures!?2016-12-30-vix-v-es-election

And, they did it twice.  The first time, VIX was hammered from 20.35 to 15.73 in a matter of minutes, which stopped ES’ bleeding.  But, traders bid VIX right back up to 21.17.  So, VIX was hammered a second time, this time a more gradual affair that didn’t really end until December 21, where it finally reached a trend line going back years.

November 9 was the single biggest daily drop in VIX since May 25, 2010, when VIX was hammered over 9 points (a total of 24 points in 4 days!) to successfully prevent a similar melt-down in stocks.  The net result this time: not only did SPX avoid following through with the futures’ earlier action, it pushed up to new, all-time highs.


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