The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, May 26th, 2014.
As called for on these pages two weeks ago, the risk adjusted S&P 500 (SPX) is now vexing sinusoidal resistance at 1900 plus, with the CBOE Volatility Index (VIX) now plumbing decade long lows. Again, the primary reasons we saw this occurring was due to the sudden increases in short interest in both the DIA (Dow ETF) and QQQ (Nasdaq 100 Index) to two-year highs, updated here every two weeks, and official financial repression, which in this case means VIX price management (suppression), enabled by the present mania in perceived risk management. It's a mania in fear spun off from an understandably and increasingly neurotic investing population pressured by real economy failure and fascist agendas.
Understandably, many are worried about the economy. However, unfortunately for them they fail to realize the stock market has become completely disconnected to any realities associated with the economy, and is more akin to a video game these days than anything else, controlled by the machines (computers, algos, derivatives, etc.) under the present circumstance set. And until the short sellers (put buyers) this is unlikely to change. Therein, it will likely take some time for these shorts to be squeezed out of the market and any sustained declines in stocks can be expected, so in terms of the sinusoidal (sine) related targets delineated in Figure 1 below, it quite possible the upper indicated fan line is vexed.
What's more, this hypothesis is also supported by the typical behavior of sine waves, which unless deflected by some external force, will complete a full amplitude extension - just like radio waves hitting your ear. The only problem with the messages from the radio waves hitting your ears these days is if you are hearing them right, along with looking at the waves on the charts below, one is not hearing sweet songs. No, in fact it's just the opposite. If you are listening closely, one is getting false images of prosperity in a fiat-inflated world, manifest in the stock market, where once the SPX hits extreme sine resistance (see Figure 1), it should go right back down to indicated support.
Think about that for just a minute. Think about what the economy will look like (and what kind of songs you will hear on the radio) if the SPX goes below 1000. What will bureaucrats, oligarchs, and bankers do then? I will tell you what. They will print more fiat money than ever before in another attempt to paper over mounting problems, and the mob will let them because they like what they think is a free lunch. (i.e. it's not.) Because the stock market has become the economy, as the economy is leveraged off the fortunes of stocks - make no mistake about it. It's the wealth effect you know - heavy on the sarcasm. Only one problem however, with increasingly few in stocks these days, goosing stocks higher helps very few - only the top 1% after inflation.
That's right - crony capitalism supported by a fascist state is not a recipe for broad prosperity (just the opposite) - something most Westerners are presently in denial about. This is set to change naturally, as Mother Nature reins supreme, however not before every card is played by the status quo, which means keeping the perpetual short squeeze in stocks alive for as long as possible. And as you would know in reading my work over the past few weeks they will be getting a great deal of help from unsuspecting speculators / hedgers who keep shorting stocks, where again, it should be pointed out short interest on the DIA and QQQ are now at two-year highs. (See Figure 1)
Thus, it will not be surprising to see the SPX / VIX Ratio extend all the way to the top fan line indicated above, which would put the cash SPX in the vicinity of 1960 with the VIX at 10.5, equaling a factor of approximately 185. Presently the SPX / VIX Ratio is at 167, meaning this could easily be accomplished in the June / July window, representing a meager 10% increase from here, helped by what is a far more substantial blow-off in tech, where once through denoted resistance below, would call for the Nasdaq / VXN Ratio to shoot up to the Fibonacci resonance related target of 377ish. Such a move would put the Comp at approximately 4350 for a double top with the VXN at 11.5, which would match 2007 lows. (See Figure 2)
So although this coming week may see a shallow correction in the upward trend, characterized by a move back to test the breakout in the Comp / VXN Ratio witnessed last week, once RSI on the monthly plot above breaks out, fuelled by a short squeeze in the QQQ, look for a 'moon shot' to take values to the target area quickly, which in this case means a month to six-weeks, putting us into mid-July in terms of looking for a reversal. It just so happens that a cycle low is expected for gold at that time, which would fit the larger picture well if stocks top out at that time as well. Here, the inverse trade between stocks and gold would reverse back to secular trends in favor of the latter. (See Figure 3)
We are showing you the above monthly plot of the VIX because it supports the idea it's got further room to fall. All of the indicators can fall towards support while still maintaining positive divergences that will eventually lead to a reversal higher in the VIX. What's more, and along the same lines of thinking presented above, it should noted it's likely the move higher off such trajectories will be significant and lasting if history is a good guide, perhaps even vexing 2008 highs within the space of just one calendar year, or pulling a repeat of 1987. Extremes do tend to lead to equal counter extremes, as witnessed in sine waves, however given the degree of compression in the system today, characterized by potentially unparalleled complacency, clearly anything is possible moving forward.
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