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posted on 30 June 2017

How Long Can Algorithms Prop Up Equities?

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Why is fear so low in the market? The VIX (Volatility Index) has been historically low over the past couple of years. Why is this? Is it because few investors feel uncertianty about future market direction? Or is there some other reason? Are investors simply too complacent?


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From 2014 to 2016, VIX occasionally tagged the bottom of a large channel, shown below in yellow. It represented extreme lows in fear and typically presaged a drop in equities (SPX: the thin blue line.)

Click on any chart below for large image.

Since the start of 2017, however, VIX has dropped below the channel bottom 72 of 124 sessions. Since Apr 21, it has dropped below the yellow channel bottom an incredible 45 of 48 sessions - including two 41% plunges.

Given that algorithms react almost instantly to drops in VIX - particularly when it drops below support - is it any wonder we've seen an otherwise inexplicable rally in equities?

VIX has company in that the yen carry trade and oil have each been quite effective, at times, in propping up stocks. But, unlike USDJPY and CL, manipulating VIX is a victimless crime (unless you count equity bears who have seen shorts blow up time after time in a barrage of V-shaped snapback rallies.)

Some estimates put machine and index trading at 90% of total volume. How long until VIX establishes new all-time lows in service of higher stock prices?

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