How Does a Corrupt Fed and Treasury Spell Success?

By: Joseph Russo | Sat, Feb 11, 2012
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In short, V-I-X, they spell success by keeping the VIX beneath 20. To accomplish this, they must use whatever means necessary to coerce market participants' behavior toward chasing equities ever higher. The end game is such that inevitably, everything will once again implode precisely because of this wretched game of ignorant subject and omnipotent master.

Below, I explain this interventionist fix in detail from a reprint penned on the topic back in May of 2010. At the time, after a brief respite to the 17.59 level, which marked the height of the first leg of the bailout rally, the authorities lost temporary control as the VIX surged to 34.54 and the Dow corrected to its July 2010 lows.

DOW and VIX

From there, for the next 11-months they worked toward fixing the VIX all the way down to the 14.75 level, which marked the May highs of 2011. Thwarted by resurgence in questions surrounding existential solvency in the Euro-Zone, they lost control again, this time the VIX rocketed to an extreme level of fear in of October of 2011 at 42.96. Following a five-month decline, dragging the Dow down to a low that tested the level of the first bailout crest, we now find the Fed flirting with success once again.

As 2011 ended, with operation twist and the inference of QE3 and beyond, Vix readings steadily fell toward 20, which aided the seemingly improbable continuation of the rally off the July 2011 lows despite the clear lack of any Euro-Zone resolution.

The big-bang rally, which then launched trade in 2012, reflected this newfound control (coercing participant risk) amid an otherwise intractable financial condition permeating the globe.

Then, on January 19, ignoring all fundamentals of debt and solvency, the market instead continued decoupling, directing its focus on the hopes of another tech-boom supported by the likes of Apple and the promise of a pending Facebook IPO.

Since January 19, the VIX had remained beneath the 20 level until today. Accompanying Friday's VIX closing at 20.79 was a sudden renewed concern over Greece and a triple digit decline in the Dow.

Relative to the corrupt Fed and Treasury, the current paradox or fly in the ointment is for them to maintain a perpetual levitation in bond prices (low interest rates) or else the Fed's high-risk balance sheet becomes vulnerable to implosion, and US debt obligations accelerate to more unfathomable levels than they already are.

The balance now rests in juggling this twisted levitation in bond prices (low interest rates) for an extended period with egregiously maligned efforts to keep the VIX beneath 20 in order to spur a further bubble in equities, all while punishing the majority of their baffled subjects otherwise known as the 99%.

To follow the unfolding drama of the cleansing good vs. the interventionist evil, stays tuned, and keep your eyes on the VIX.


The Fix in (the VIX)
By Joe Russo, Elliott Wave Technology | reprint from May, 2010

To measure the ongoing success or failure of massive QE "working groups" interventions, all one needs to keep an eye on is the VIX. Readings below 20 suggest, "The FIX is in", whereas readings above 20 diminish the mission control effort to reflate monopoly-saving bubbles.

In effort to maintain control of supreme monopolies, policy makers and monetary authorities have successfully fostered an egregiously false paradigm of ever-rising paper asset values in setting policy and enacting legislation that in effect "FIXES the VIX" to extraordinarily low levels. This fuels rampant speculation, and excessive risk taking without regard for useful gains in productivity and the real economy over the medium or long-term.

Contrarians have historically viewed traditional VIX readings below 20 as excessively bearish, although as highlighted in the green timeframes in the chart below, readings beneath 20 have been quite the "norm" in recent decades.

Conversely, prolonged and/or extremely high readings toward 40 indicate a high degree of anxiety and fear. Contrarian options traders regard such high readings as bullish.

Those orchestrating the so-called "great moderation" have succeeded in keeping the VIX beneath the 20 level for a whopping 48% of the time over the past 24-year time horizon. Doing so was complete MADNESS. The result of such folly clearly goes long way in explaining frequent occurrences of the sheer insanity displayed throughout the financial markets in recent years.

Flawed monetary policy amongst other legislative measures has provided accommodation for inordinate levels of complacency for extended periods, and has proven to engender more frequently acute bubbles and busts. In our view, this lunacy has reached a point of no return whereby rampant speculative bubbles are the only means by which authorities can hope to sustain themselves as viable.

In our view, past periods of the so-called great moderation was nothing more than a gargantuan failure of epic proportion. Since leadership continues to double down - going ALL-IN with an endless supply of manufactured fiat credit, there is no resolution to the paradox beyond continuing to foster such policies in perpetuity. Sadly, this is where we find ourselves today.

With the exception of a very brief respite in 1990-1991, following the crash of '87, the VIX remained excessively bearish from a contrarian perspective (beneath the 20-level) for nearly eight years. That is a long time to maintain contrarian disciplines. Harshly discredited, mainstream cast aside contrarians along with their traditional measures of fear and complacency in favor of the new (sub-20) bubble paradigm.

This set of policy-induced conditions provided for a rather unhealthy and excessive 320% gain in the Dow industrials over an extremely short nine-year period. Of course, that gain eventually blew up and totally evaporated in the crash of 2000-2002.

During the dot.com bust in 2000-2002, monetary authorities went into emergency accommodation mode once again. From 2003 - 2007 they enacted more policies inciting excessive risk-taking, which kept the VIX beneath the 20-level for another four solid years.

From 2003-2007, the Dow advanced amid an "echo bubble" racking up another straight 44 months of continual daily VIX readings below 20. This encore policy-induced echo-bubble busted even harder than the first amid the crash of 2008.

It appears the only way equity markets can continue to advance, is with the full faith and backing of an implied US Government/Federal Reserve backstop of infinite accommodation and bailout provisions.

Over the last 25-years, there have been only two episodes of outright existential panic. Each surpassed typical levels of fear beyond the historically accepted 40-level. Both panic readings registered prints north of 60. The first occurred amid the crash of '87, and the second most recently amid the crash of '08. The flash-crash mini-black swan event, which had more to do with a lack of buyers and liquidity rather than computer glitches, did not even come close to reaching these existential panic zone readings.

We began to pen this article back on May 3 when the VIX chart was appearing "traditionally bearish" but "new-false-paradigm-normal" (bullish). That is to say that the VIX had returned to producing daily closes beneath the bubble zone of safety - registering consistent daily closes beneath the 20-level. Alas, a new bubble mania had apparently begun to manifest amid the persistent V-Shape bailout rally off the March 2009 low.

We rendered the 3-May chart below as this article began to take shape. Before we could finish the piece, the flash-crash of 6-May had come and gone.

3-May 2010

6-May 2010:

This mini-Black Swan event rocked the daily close on the VIX well north of its safe bubble-zone beneath 20, but nowhere near level s of fear let alone outright panic. In fact, the closing VIX on 6-May had barely reached a level of balance or equilibrium (30) between fear and complacency.

10-May 2010

Traditionally high VIX readings (40+) usually occur after an extended or sharp decline while sentiment is still quite bearish. Historically, contrarians view high readings toward the 40 level as bullish. As such, it is reasonable to conclude that markets are in a balanced state of equilibrium at VIX readings close to the 30 level.

Conflicting signals between VIX readings and market levels can also yield sentiment clues for the short term. If the market declines sharply and VIX remains unchanged or decreases in value (towards complacency), it could indicate that the decline has further to go. Contrarians might take the view that there is still not enough bearishness or panic in the market to warrant a bottom. If the market advances sharply and VIX increases in value (towards panic), it could indicate that the advance has further to go. In such an instance, contrarians might take the view that there is not enough bullishness or complacency to warrant a top.

In the mind of mainstream financial media, fixed VIX readings beneath 20 (excessively bearish and overly complacent) are "the new (bubble-permitting) normal" that ignorant cheerleaders applaud. To pursue and lobby for such policies of accommodation that foster such readings is foolish, self-destructive, and ultimately suicidal.

In closing, the only way the perpetual denial-based extend and pretend policy wins is with sustained and extended periods of VIX readings beneath the 20-level. Sustained VIX readings above 20 shall exacerbate the already terminal problems occurring at mission control.

 


 

Joseph Russo

Author: Joseph Russo

Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Joseph Russo

Since the dot.com bubble, 911, and the 2002 market crash, Elliott Wave Technology's mission remains the delivery of valuable solutions-based services that empower clients to execute successful trading and investment decisions in all market environments.

Joe Russo is an entrepreneurial publisher and market analyst providing digital online media solutions designed to assist traders and investors in prudently and profitably navigating their exposure to the financial markets.

Since the official launch of his Elliott Wave Technology website in 2005, he has established an outstanding record of accomplishment, including but not limited to, ...

  • In 2005, he elicited a major long-term wealth producing nugget of guidance in suggesting strongly that members give serious consideration to apportioning 10%-20% of their net worth toward the physical acquisition of Gold (@ $400.) and Silver (@ $6.00).

  • In 2006, the (MTA) Market Technicians Association featured his article "Scaling Perceptions amid the Global Equity Boom" in their industry newsletter, "Technically Speaking."

  • On May 6 of 2007, five months prior to the market top in 2007, though still bullish at that time, he publicly warned long-term investors not to be fooled again, in "Bullish Like There's No Tomorrow."

  • On March 10 of 2008, with another 48% of downside remaining to the bottom of the great bear market of 2008-2009, in "V-for Vendetta," using the Wilshire 5000 as proxy, he publicly laid out the case for the depth and amplitude of the unfolding bear market, which marked terminal to a rather nice long-run in equity values.

  • Working extensively with EasyLanguage® programmer George Pruitt in 2010 and 2011, the author of "Building Winning Trading Systems with TradeStation," he assisted in the development of several proprietary trading systems.

  • On February 11, 2011, he publicly made available his call for a key bottom in the long bond at 117 '3/32. Within a year and half from his call, the long bond rallied in excess of 30% to new all time highs in July of 2012.

  • For the benefit of members and his general readership, he responded to widespread levels of economic and financial uncertainty in the development of Prudent Measures in 2012.

  • He publicly warned of a major top in Apple on October 26, 2012 in the very early stages of a 40% decline from its all time high.

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