VIXplosion Warning!

It was another strong week for the major averages. The S&P 500 (SPX) closed the second week of 2020 with another record high, closing at 3329.62. The index is up 3.06% already YTD and up 1.97% from last Friday. Thus far, for 3 consecutive years January has started off rather strongly.

Of course, the strong start to 2020 for equities isn't appreciated by everyone. The strong start to the year in January 2019 was met with ample skeptics and permabears calling for a retest of the December 2018 lows, which took place on what is now known as the Christmas Eve Market Massacre.

Back in early 2019 Finom Group (for who I am employed) chronicled CNBC and Cornerstone Macro Research's Carter Worth during the month of January and after what appeared to be a V-shaped recovery

"On January 28, 2019, Carter Worth stated very clearly that he expects the market will return to test its lows from December 2018 and after a 50% retracement off the December bottom. What Worth’s charts couldn’t identify were the shift in gamma positioning amongst CTA’s, hedge funds and the like, which while proved minimal positioning at best, was still enough to create a Breadth thrust and Zweig thrust." 

I think it's safe to say that not only was Carter Worth proven wrong and with great wanting, but it displayed his ongoing bearish bias toward the market, more so than was ever appreciated by the CNBC audience. His bearishness only proliferated throughout 2019 with one of his Q4 2019 calls on the discretionary sector ETF (XLY). Almost immediately after suggesting investors should underweight the discretionary ETF, it did nothing but move higher, above $120 and to where it enters trading on Tuesday at roughly $127 per share.

It was around the same time last year that Carter Worth was outlining the probability for a VIX-explosion in the market. Let's be honest, many market participants were calling for another Volmageddon type of event back in November 2019 as record level non-commercial VIX Futures were sold short.

But like underweighting XLY, as Carter Worth offered then, this forecast or technical analysis didn't come to pass. There was no "VIXplosion".

"The VIX is not making new lows as the market is making new highs, it's holding more recent past levels. That coupled with record level short VIX futures as reported by the Commodity Commission (COT) is a set up for the market to go the other way (down)."

It actually becomes increasingly en vogue to lay claim around the next VIXplosion or Volmageddon 2.0 and since the February 5, 2018, actual Volmageddon event. The longer the VIX remains at relatively complacent levels, the more market participants seem to, and all of a sudden, happen on the reason or market signals that will cause another VIXplosion event.

Remember this VIX forecast from December, which was accompanied by a Q1 2020 equity market forecast?

Of course, the Jim Cramer offering played out on his CNBC Mad Money show, and right in the middle of a mini market pullback in early December. What better time than to drive fear into the hearts of investors, right?

“The charts as interpreted by Larry Williams suggest that the market’s animal spirits are turning from bullish to bearish, at least for the next few months, and he thinks you should try to sidestep the pain here.

Right now, based on the volatility cycle, he’s anticipating a sustained upturn in the VIX, which tends to be very bad for the S&P 500. Based on his forecast, the volatility index should keep rising through Feb. 11,” Cramer said. “In other words, investors are starting to turn bearish here, and Williams expects them to stay that way for the next couple of months.”

Investors are turning from bullish to bearish huh? I'm guessing that's why the market did and has done nothing but melt higher and achieved continues new all-time highs throughout December 2019 and thus far in 2020? And when looking at just net positioning in S&P 500 futures among asset managers and leveraged funds...

Does anybody see asset managers turning bullish in late 2019 based on futures positioning? Didn't think so. And CTAs have had a higher beta to equities in the past, but this too has been rising fast since November 2019 and approaching the all-time highs now.

Last, but certainly not least, we don't see equity put/call ratio levels like this when investors are turning from bullish to bearish, now do we? In what world does this guy Williams live in that Cramer decided to offer...

“We could have one more bounce before the negativity fully takes over, but he thinks you should use any strength to ring the register,” said Cramer. “I agree with him that we were due for a shakeout ... and since I expect the president to raise his tariffs on China in two weeks, it might take a little while for the pain to unfold.”

1 2 3 4 5
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.