The Dow Jones and the S&P 500 continued to hold their ground in spite of the market volatility and the VIX Peels Back as the S&P 500 Stabilizes. Why?
The answer lies in the historic failure of the mainstream media to accurately report the VIX: Not only did the mainstream media fail to report the fact that the S&P 500 had hit its pre-financial crisis high, they also failed to accurately report the fact that the VIX had plummeted in response to the volatility of the markets and the fears of a “flash crash.” While it is clear that the media has a skewed view of the market, how can it be fair for the markets to rely on such a flawed analysis?
The difference between this time and other periods in history is that in recent history, we are dealing with a fairly large disparity between the equity markets, particularly in terms of volatility. As a result, the concept of “high volatility” is no longer meaningful, especially when all other factors are equal.
To explain this, consider the fear/reflation model used by many macro advisors. This model relies on the idea that if the Federal Reserve continues to add to the financial problems of a country, then inflation will increase and this in turn will lead to the central bank being forced to pull back and pull the money printing button.
Because the amount of money in circulation is so low, any changes in the amount of money in circulation are seen as a real risk. At the same time, a loss of faith in a government that can solve our economic problems will lead to citizens demanding that the central bank to get out of the way.
All of this means that the VIX makes more sense in the context of financial crises. Rather than focusing on the idea that the VIX Peels Back as the VIX Stabilizes, now we can focus on the concept that the VIX Peels Back when the S&P 500 holds steady because the Federal Reserve Continues to Add To The Financial Troubles Of A Country.
This is why I continue to believe that it makes sense to use the “Fear/Reflation Model” and to use the VIX instead of the FANG in financial crisis reporting. Perhaps you will join me in taking a similar approach to analyzing the S&P 500?
The problem with the FANG is that it is based on the premise that a collapse in the price of gold or oil will automatically cause people to begin to switch their money to the security of the dollar. In reality, this is rarely the case.
Even if the price of oil or gold suddenly falls, most people will likely still be holding on to the safety of the dollar. Since most people will hold on to the dollar, any paper currency will still be worth a lot of dollars.
However, when the Federal Reserve begins to add to the troubles of a country, this inevitably leads to people withdrawing their dollars from the banking system and also from the stock market, which mean that the VIX will rise and it will be forced to pull back. Therefore, it is important to keep your eyes on the VIX and to understand when it will spike so that you can buy before it rises.
Of course, the most important thing about the FANG and VIX is that they fail to account for how any situation involving a country can potentially evolve into a bubble, as the FANG fails to recognize that bubbles tend to burst. Similarly, any bubble will soon collapse, causing the VIX to begin to rise again and the upward spiral in which the asset prices are created.
While it is true that the media has not accurately reported the differences between high volatility and stability, I am pleased to see that the VIX has risen once again and can now be treated as a measure of economic health. Consider this in 2020.