2019 Redux?

In late 2019, many were mystified by a market that continued to rise even in the face of worsening fundamentals. VIX – the supposed fear gauge – inexplicably plumbed new lows and, eventually, broke down below a channel (in red below) dating back to late 2017….

…even as news of a deadly pandemic became more and more concerning.  For chartists, the breakdown in VIX was frustrating but telling. Algos and all the portfolios which key off them were keying off VIX. And, the breakdown was all the algos cared about – to a point.

Eventually, the breakdown was no more. VIX soared and the market plunged. But, for over 3 months (including, of course, the usual YE run to the barn), the market made new highs based almost solely on the vanquishing of fear.

It’s hard not to think of 2019 when observing the current market. With the Fed’s own forecasts and the bond market screaming “recession,” stocks are ignoring rising interest rates and inexplicably bouncing. Inexplicable, that is, except for VIX.

I have no secret insider source on the Fed’s trading desk. But, if you were trying to raise interest rates without trashing the stock market, wouldn’t you be shorting VIX every time the market dipped? It’s safe to say that the latest ongoing assault on VIX is the tail that’s wagging the market’s dog…just like in 2019.

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