EYE OF THE STORM

This is a special market update.

I've shown many charts here and on Twitter comparing the similarities and differences between this sell-off and the other recent volatility shocks. Yesterday I showed a close-up view of the 2018 volatility explosion that took place on the Monday (Feb. 5th) following the jobs report / FOMC / Tech earnings. During that event, the market made a new lower low on Tuesday morning and the VIX made a new high which was the high of that entire vol shock. For the market it was a capitulation low. Then a bounce took place from that low and lasted into mid week but then the rally stalled and the market made a second re-test low on Friday which held. What happened this time however is that the low of the week was Monday's open, and since that first hour of trading there has been a non-stop rally back into the Monday gap, all the way back to last Friday's closing level. It's as if the overnight crash never even happened.

I call this the worst case scenario.

The reason I call it that is because it clearly indicates a total lack of fear and capitulation. In addition, we see that the oscillator is not as oversold as it was back in April despite having crashed down into the same correction zone. Even the minor pullback at the end of May was more oversold than this one. These rabid BTFD rallies prevent the market from making a low that can last more than a matter of hours or days.

Here we see a chart of the Tech sector with NDX two day volume and the total put/call ratio. What we see this time is record selling volume attended by lack of fear. Which means that machines were selling the whole time and retail gamblers were buying, encouraged by copious pundits.

Another problem with this selloff is that far too many U.S. investors are ignoring the burgeoning global dislocation. The overnight futures crashes that occurred three trading days in a row (Thursday, Friday, Monday) have already been forgotten. It wasn't just the Japanese Nikkei that has seen an historic level of selling, it was also the Korean Kospi and the Taiwan stock market. Bear in mind that China and Hong Kong stock markets are already at multi-decade lows. In other words, we are witnessing market meltdown in Asia in real-time.

I predict India will be next.

This is what I call sky-diving without a parachute.

When you look back at the chart above the one showing ever-increasing NDX down volume with each selloff, you have to ask the basic question, what has changed since the pandemic?

I believe the answer is that investors/traders have become far more leveraged and at the same time far more convinced of central bank bailouts. I think that will be the fatal legacy of the pandemic asset inflation bubble the belief that every dip should get bought on maximum leverage.

I want to remind everyone of one important point: Back in 2008, the Fed cut rates from where they are now 5.25% down to 0% they also initiated record quantiative easing. Even still, stocks dropped -55% and a deep recession ensued.

The bottom line is that I don't think we've seen a high yet in the VIX and I think right now is merely the eye of the storm.