What the $VIX Telling Us Now

by William Kurtz, Candle Wave LLC

The “VIX” is the “Market Volatility Index,” otherwise known as the “Fear Index” or “Complacency Index.” When the VIX is low, traders (in the aggregate) are complacent, and are optimistic that the market will rise. The VIX is roughly an inverse reflection of the S&P 500.  When the VIX hits a Low (say, below a reading of “16”) and bounces off it, the S&P will be found to have declined.

The VIX closed Friday, August 17, at its lowest Close since mid-2007, just before the Dow Composite posted its all-time High and several months before the Industrials and the S&P 500 did the same. Conversely, the VIX was high in 2008, as the Dow Industrials Index was in its dash to the downside, culminating with the Dow’s reading of 6469.95 in March 2009.

Yesterday’s VIX Closing at 13.45 is a sharp warning that the S&P 500 will soon reverse to the downside.

Click on chart for larger image.

The stock market has been kept artificially high by the infusion of “stimulus” into the financial system by the Fed. The stimulus has been quackery, in that the money which was infused into the system
was either borrowed or created out of thin air.  This has not been the equivalent of injecting vitamins or genuine food value; rather, it has been the same as injecting methamphetamine. The exercise is bound to end badly. Traders are driving under the influence of an addictive drug, and will wind up wrapped around a tree.

We are living in a gigantic bubble, created and sustained by “funny money.” The bubble will deflate, as all bubbles eventually do.  The deflation could occur like a popped balloon, or it could be
like a slow tire leak.

Treasury Bond prices appear to have rolled over. The prospect is for a continued decline in T-Bonds, as interest-rate pressures increase. Municipal bonds, as a class, and “junk” bonds, as a class, will suffer widespread defaults. The “unrated” municipals, in particular, are especially vulnerable. And it’s the “unrateds” which account for most of that group.

The best place to be will be in Cash, whose value (in terms of what it will buy) will increase as deflation grabs hold, while almost everything else – including Gold and Silver – decline in value (in other words, a Dollar will buy more of the same Stuff tomorrow or next month or next year than it does today).

I think it would be well to have a “parachute” strapped to your back, one that has been properly packed; so that you can have a reasonable expectation that it will open when the airplane runs out of gas, you jump out the door, and pull the cord.

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