Picture a 23-year old MIT grad in a windowless room on, say, Dearborn Street in Chicago, with a big red button like the one to the left in front of him and a single monitor displaying SPX.
Whenever stocks come close to a 1% decline or threaten to make a lower low, an alarm goes off. The kid starts mashing the button for all it’s worth, shorting VIX until SPX reverses — which it does, nearly every time. For those who care about such anachronisms as market integrity, it’s terribly vexing.
Anyone who watches the “markets” closely every day knows the scenario all too well. It has produced countless V-shaped recoveries and a steady string of new highs. As of yesterday, it had been 82 days so far since a 1% loss in SPX. The last time this happened was in 2006, when the streak reached 94 days. Before that, it was in 1995 that it reached 105 days.
All together, there have been only 22 instances in the 17,000 trading days since 1950 (when the S&P 500 index was created) where SPX went 105 or more days without a 1% drop. A quick glance at the chart below from the Statistical Ideas blog shows the same info in graphic form, and illustrates how negative days have become increasingly rare over the past few years. Of course, it was during this time period that central banks became more actively involved in propping up markets.
Yesterday was one of those days that had loads of potential to break the streak. Crude oil, another driver of bullish algos, had shed over 5% in the past two days and was being buffeted by the second worst inventory data in history. Another favorite of the market manipulators, USDJPY, was capping off a nearly two-month decline.
Economic data has been weak lately: everything from consumer credit to construction spending. And, the president so many expected to be lowering taxes and goosing spending by now has shown more interest in tweeting than in fixing the country’s problems.
It was no surprise that VIX started the day by breaking out of the falling channel it’s been in since the election. But, as I noted in the daily post, it was the 6th such time VIX had broken out in the morning. Each previous time, the breakout failed and stocks closed higher on the day. Would this time be any different?
VIX started the session off with a 4.4% spike off the previous day’s close, which correlated nicely with SPX’s gap lower and subsequent 7-pt drop. And, the EIA’s crude inventory report was coming up shortly.
At 9:52 AM, the VIX kid must have decided enough was enough. Within the next hour, VIX was slammed back down to its previous close. I didn’t think too much of it at first, as it’s not unusual to get a rally leading up to 10AM.
But, when the crude inventory data came out at 10:30 AM and CL and SPX both started selling off, VIX gapped down sharply. The rest was textbook VIX manipulation. Note that VIX had established a trend line, shown below in as the dashed purple line, that was swiftly broken.
VIX bounced just above the previous low (the asterisk below), which meant there was a chance that SPX — which had rallied 9 points by then — might run out of steam. We’ll walk through the remaining turning points, signified by letters in the charts below.
b. As SPX broke down, VIX suddenly plunged to new lows, sending SPX back above the broken TL.
c. VIX bounced up to its SMA10 — its second backtest — allowing SPX to decline to a marginally higher low.
d. VIX tumbles sharply — another lower low to prevent SPX’s purple TL from breaking down.
e. Another near breakdown of the purple TL…VIX responds with even lower lows.
f. New lows for VIX, now off 5.2% since its earlier highs, allows SPX to break out above the neckline of an Inverted Head & Shoulders Pattern. It’s now gained 9 points and is firmly back in the green for the day.
g. Someone decides they don’t want SPX closing above the neckline (dashed, purple line), and VIX bounces until SPX falls back to SMA5 200 support.
h. The usual VIX end-of-session sell off sends SPX back above the neckline.
i. VIX’s little spurt at the close ensures that SPX finishes precisely on the neckline — leaving both bulls and bears scratching their heads re overnight positioning.
There were other things going on during the session, of course. Despite the ugly inventory data (second biggest build in history, remember) CL was shoehorned higher — finishing with a slight gain on the day. And, USDJPY continued its pattern of threatening to break out of the falling channel it’s been in for several months. I count eight distinct tags of the channel top on the 5-min chart — each of them when SPX needed a helping hand, of course.
Rest assured, when CL finally does start plummeting, USDJPY will be spiking higher to try and compensate. The yen carry trade has been dormant, but is far from dead.
Now on to this morning’s charts, which hint at somewhat more exciting days ahead.
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