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.) 
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.
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%.)
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!?
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.
continued for members...
First, a quick wrap up of current conditions. We remain long from 2244.69 – yesterday’s 12:14 update. A sustained drop through the SMA20 at 2247.02 would be cause to dump the position.
As discussed yesterday, ES 2235.84 would make a nice backtest target. But, it would mean at least an intraday channel breakdown.
USDJPY and NKD held their new channel bottoms — so far.
While CL continues a very gradual rolling over, punctuated with intraday rallies as necessary to support SPX.
UPDATE: 9:46 AM
SPX is testing the SMA20, while VIX has broken out of the falling white channel and is testing the SMA100. The SMA200 at 14.33 represents the bottom of the red channel which broke down in mid-November — which makes it a very legitimate target IMO.
UPDATE: 9:55 AM
SPX dropping through support here. Back to short, as the next support is around 2240 — basically wherever it is when ES reaches 2235.23-2235.84. CL is ramping, so it might not come quickly or easily. I’d hold short until it’s reached, then reevaluate with an expectation that we’ll be going long. Stops should be around the SMA20.
UPDATE: 12:48 PM
Almost there. They could force it any second by running VIX up to 14.33 or allowing CL to dip below that white TL.
UPDATE: 12:52 PM
There’s the ES target. Reverting to long here at 2240.40 with tight stops. If I’m wrong/early, SPX has at least 10 points more downside before it reaches any meaningful support.
Must admit, I’d be a little more confident if VIX had already tagged and reversed off 14.33… But, we do have a channel midline here at 14.18, so it might work as well. Watching now to see if CL and USDJPY start rallying…
Remember, 2248.33 is the magic number if they care about maintaining a 10-handle on the annual return. I’m sure many of you have noticed that 2248.33 is right about where the top of the falling white channel lies. Odds are the SMA5 200 will end the day at about that price.
* * *
My apologies for the interruption in the above thread on 2016. My wife is whisking me away to celebrate our anniversary. I’ll have to finish later tonight or, more likely, tomorrow.
Here’s the setup for the remainder of the day. I expect SPX to get back to at least 2248.44, probably towards the end of the day. So far, so good.
As far as the weekend goes…our analog suggests more upside early next week. However, I think TPTB might be satisfied to have gotten out of 2016 with the gains they have. So, I’d be extra cautious in maintaining a long position. It makes the most sense for those who can manage the gap risk and/or hedge their positions. Otherwise, why have that worry hanging over your weekend?
If January 5 really represents a turning point, then I’d concentrate on shorting oil or USDJPY. Both are extremely overextended, and one of them is very likely to drop a lot. If TPTB have really got this figured out, they’ll see Jan 5 as the day to create a breakout of sorts, and VIX will back off 14.33 quite vigorously.
More later.
.