VIX explodes in massive short squeeze

What another incredible week! VIP Traders Club members have been waiting for this action for some time.

In particular, the VIX index of volatility shot up to one of my long-standing targets of 40+ from a lowly 15 just three weeks ago. I had forecast a massive short squeeze weeks previously as hedge funds had amassed a record number of short positions.

And in the inevitable short squeeze, this is what you get – an exponential rally as the masses of shorts start to cover. When VIX started rising late last year, I knew then that stocks were topping and my expected collapse was only hours and days away.

It is always useful to compare action in related markets, such as these.

Two weeks ago, I featured the France 40 stock index and showed why it was vulnerable to a sudden decline based on the chart patterns and sentiment. This is the chart of last time

I pointed out that the recent high did not exceed the July 2 2007 ATH and was likely an historic wave 2 high. If so, that would lead to a sharp move lower in a third wave, according to the Elliott Wave Theory. So, did we see typical third wave action in the intervening two weeks?

It certainly did! In common with almost all major stock indexes, the past two weeks has seen torrid downside action that justifies my forecast for a third wave. In a five wave impulsive sequence, the third wave is usually the strongest and longest. I like to say that third waves take no prisoners. In this case, it is the bulls who are suffering. But getting on board after the train has left the station is like trying to catch a tiger by its tail.

But the key to my advice was my perfect timing. I believe only my Tramline Method can offer reliable low risk trade entries at the right time. If you have a better method, please contact me. It could be worth a considerable sum.

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The speed of the descent has many totally amazed – and unbelieving. That’s what 11 years of mostly advancing stocks can do to lull most into epic complacency, especially given the terrific performance of last year. That was seen as normal. But the signs of an impending top were all around us in December/January. I listed some of the warning signs in these pages.

I have done a small sampling of the advice offered in the MSM in the face of this very sudden 20% loss of wealth. In not one did I see anyone suggesting cashing out. Universally, they advised ‘don’t panic and stay the course’.

That is the standard advice offered in such circumstances. Why take an enormous risk to career by swimming against the tide? If you are right, and stocks continue to decline, there will be few accolades. Gloomy investors will be in no mood to send you flowers. And if you are wrong and stocks continue to recover, not only will you look a fool but your career may be in jeopardy as the odd-man-out.

But as an independent analyst whose business success depends on getting the major trends right, I can call ’em as I see ’em and take the lumps if I get it wrong – and attract clients when I get it right (provided they act on my advice!).

And on Thursday, the US has banned all flights from Europe (except the UK). I view this is a ‘let’s get real’ moment in the markets. Some MSM pundits are even mentioning the dreaded ‘bear market’ epithet. The sense of fear is becoming very real.

In terms of the bear market, we are only just getting started. Huge profits will be made by those on the right side of this historic once-in-a-generation extinction of wealth.

Provided banks, who keep your funds, remain solvent (and that is an open question) traders who see this golden opportunity will be able to snap up great assets at bargain basement prices at the lows. They will then be ready for the next asset price inflation phase when buying shares will be very profitable.

But investors must pass through the Slough of Despond first – or cash out and position short as we have.

The Fed and BoE slashed rates – did that help stocks?

The Fed last week cut by a huge 50 bps and the BoE followed in another ’emergency’ cut of the same amount on Wednesday. Most investors believe that a rate cut equates to higher share prices. In fact, that view is held as almost a Golden Rule. Central bankers believe it – and they are the experts, aren’t they? That’s why they cut rates to keep shares aloft.

It’s obvious, isn’t it? Lower rates translates into lower borrowing costs and higher profits on enterprise. But as has been shown many times before, context is key.

It is a fact that the Fed cut 13 times from 2000 to 2003 and the S&P declined 51%. How about that? Also, between 2007 – 2009, the Fed cut 10 times and the S&P? It dropped by 58%.

Please do not make that schoolboy error that so many make. In a bear market, a Fed cut is seen by the market as bearish, not bullish. And we are now in a bear market.

Today’s cuts are in direct response to the business interruption prompted by the coronavirus fears. They are intended to tide companies over until things get back to ‘normal’.

But what if things don’t get back to normal? What if consumers have permanently changed their profligate habits where buying more ‘stuff’ was considered normal. What if they have decided that with the huge chunk of their salaries taken up by housing costs, a more prudent approach is to buy less stuff they don’t really need and start saving.

In other words, a swing from over-consumption pre-virus to a more war-time make-do-and-mend lifestyle would collapse the economy! The imminent enforced slowdown in activity (self-isolation) may impel many to consider major changes that involve less consumption and more saving. And with their shares rapidly losing value, their nest egg is cracking before their eyes. If that doesn’t turn them conservative, I don;t know what will.

Have we really reached Peak Stuff? The Italians are way ahead of us and may have already come to that conclusion.

Is the virus to blame for the stock crash?

As I expounded last time, the appearance of the coronavirus is actually a symptom of our weakening immune systems that is a consequence of our growing negative social mood. It had been building for some time as the final momentum thrust of the Great Asset Mania was putting in the final touches in 2019 to the biggest bull run in history.

In January/February, all sentiment indicators I follow were massively off the scale – and perfectly teed up for the Great Reversal we are seeing.

Actually, throughout history, pandemics have appeared either at the start or near the end of major bear markets. They signal bear markets. The current one is probably the biggest since 2018 (Spanish Flu) – at least in its impact on markets, if not fatalities.

And our more negative mood is showing up in various other ways. It is leading to a fragmentation of societies into smaller units, such as the ‘identity politics’ of today. There is a sense of unease everywhere.

I fully expect riots on the streets against government who are failing to protect them (I am looking at you, Italy).

Stock buy-backs are collapsing

And just as I expected, when the market turned, the huge stock buy-backs (that propped up the Nasdaq in 2019) are falling off a cliff. And as the markets fall further, many companies will be forced sellers of their own stock as working capital shrinks.