Tuesday, April 21, 2009

Nearing Completion Of A Bearish Formation In The VIX

This week I am going to put up a fair amount of chart posts as a follow up to last week's many chart posts. Charting is something I don't do as much of as I used to but we are going to experience a renaissance with a continuation of a "Chart You to Deathapalooza".

Many are pointing to a declining VIX as a confirmation this crisis had passed. The VIX was at all time lows before this crisis started. How did that work for you as a sign of future economic prosperity? In other words, a falling or low VIX is completely useless as a future indicator. Since it is inversely correlated to equities, it is no different than stating the stock market was going up in 2007, so the future must surely be bright. Oh, I forgot. People were actually stating that in 2007. The same people now citing a falling VIX as bullish. Do people really get paid for this?

The VIX is working out a falling wedge pattern. If this pattern resolves itself in a classical manner, it will result in a VIX eventually rising to at least 60. In other words, more substantial future declines for stocks and a retest of the old highs in the VIX.

Much of the 'investor class' has bought hook, line and sinker that this crisis has passed. They have plowed into government-backed securities (loosely defined to be pretty much anything with a certificate anymore.) and driven rates and spreads down to levels that aren't sustainable in a normal climate, let alone the crisis we are witnessing. But then the investor class missed this crisis completely until it had decimated their portfolios and our investments they were to be managing. Post facto they became experts at what the government should do to fix it - bail out the investor class. Isn't that rich! Government cannot look to Wall Street for answers to this crisis. It must look to main street.

Effective government policy could help deal with this crisis. Instead, as we have said repeatedly, the government is extending this crisis and banks are creating future losses as I write this. Too many are guessing that the reduction in volatility as a sign the crisis has passed. The VIX is telling us we are in the eye of the storm.

Ancient mariners knew the sea was most calm before the storm.

posted by TimingLogic at 7:34 AM