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posted on 03 May 2017

VIX Drives Stocks Higher ... Again

by Pebblewriter,

Just last week, we reiterated how VIX has evolved from a reliable indicator of market risk to a tool with which stock prices are being supported [see: How Broken is the Market?] Since December, tags on the bottom of the long-term yellow channel below have increased in frequency from once a year to about once every four sessions.


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As if on cue, VIX’s actions yesterday should put any lingering doubts to rest. It was hammered to single digits, lower than it has been since Feb 2007 and a scant 0.59 from its all-time lows set on Dec 22, 1993.

Click on any chart for large image.

To be clear, VIX did not fall to 9.9 because investors looked at the investing landscape and decided that downside protection was unnecessary. It was driven to new lows specifically to support stocks when they were in danger of losing momentum.

The two critical moments were at the open, when SPX was in danger of repeating its pop and drop from last Friday - and, around 1pm - when SPX was losing momentum and had dropped back into a falling channel.

They are marked with yellow arrows on the 5-min SPX chart below.

Note that VIX had already dropped 37% in the past week in order to help SPX break out. It sat near its Feb lows five sessions in a row, dancing about the .886 retracement of its rise from those lows.

Yesterday, as ES began to break down from its overnight momentum (purple arrow), VIX suddenly plunged .45 within seconds. I call this a “shot across the bow." It’s designed to scare off bears, and it usually works.

SPX was in danger of dropping back through the neckline of a nice little H&S Pattern that targeted 2376. And, VIX’s action held it above the neckline for about 30 minutes.

At 10AM, however, SPX began to fall below the neckline again. So, VIX began dropping again, eventually falling below the dotted red TL (which connected last week’s lows) when SPX suddenly plunged all of 5-points at 12:50PM.

Instead of falling to flesh out the white, or even red channels, SPX broke out again and even topped its .886 Fib for two hours before closing unchanged on the day.

Is it a problem that central banks and their allies can manipulate stocks lower at will by shorting VIX? Should it bother us that rallies can be ordered up like a burger and fries at a fast food joint?

I could make a pretty good argument for the importance of market integrity. But, that ship has already sailed, as detailed last week in How Broken is the Market? Instead, I’ll remind investors and traders alike that every previous effort to prop up stocks long after the underlying economic reality argued for a correction has failed. Every. Single. One.

I see no reason why this one should be any different.

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