The Great Depression in fear finally might be over.

I've been on VIX bottoming watch for some time now and as a result I have gotten stopped out of TVIX several times for minimal losses.  My most recent bottom call on TVIX obviously went bust and I retreated to let the charts give me more data.  Odds, folks.  Odds and not certainties.  The key to survive and thrive is not to fall in love with a call.  You look at the charts, come up with a thesis, and then place a bet.  If the bet goes against you, you have triggers that tell you to sell.  When they say sell, you sell.  You do not hold and and hope that it comes back because it could be a long time coming.  Keep doing this over time (especially the part about having a good chart model reason why you think a bottom is in and then buying close to the trigger point so that you stop your losses early) and sooner or later you will find the bottom.  And then you let your profits run.  These are the time tested lessons of winning traders.

The folks over at Elliott Wave International (and Prechter's 2002 book, "Conquer the Crash") also taught me about the importance of market sentiment when calling market turning points.  When everyone is bullish and there is nobody left to be a bear, it's time to be a bear.  And vice versa of course.  Any Asian ferry captain will tell you that when everyone runs to the same side of the ship, it capsizes.  Sorry if that is not politically correct to say but it is true nonetheless.  I will never forget the chart of "Pompous Prognosticators" whose high flying words before, at the peak, and during the crash of 1929 eventually came back to haunt them.  I especially like the quote from the clueless academic Irving Fisher, whose sheepskins and honors ill-prepared him for the street hustle, pump and dump con which is the basis of all stock markets that allow endless margin leverage (like ours does).  Fisher eventually lost essentially everything in the crash.  He said:

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929


Yeah, great call man.  Your mother should have named you Mark or even Patsy instead of Irving.  I don't say this lightly.  I say it because the stock market is in fact a confidence game, a con job and most Americans have taken the bait along with the hook, the line and the sinker.

When sentiment reaches extremes, that's when the risk of a trend reversal is highest.  the patriarch of the Kennedy clan, Joseph P. Kennedy famously said that he got out of the markets before the crash when the shoe shine boy started giving him stock tips. Kennedy, being a criminally minded, prohibition era booze running con man in his own right, knew a leveraged pump and dump when he saw it.  Since he was by nature a wolf and not a sheep he was not influenced by the herd think.  He observed the herd from the outside as a wolf eyes the flock.  He was not a herd member but rather a pack member.  This is what enabled him to build the family fortune during the crash.

And now back to the present.  I am on record several times saying that I think there is a great depression in fear (which really equates to volatility and which is measured by the VIX) and that such extremes are generally signs that a reversal is near.  Today, Elliott Wave International provided a pointer to a story in the Wall Street Journal which wondered if Fear is dead.  The quoted author wrote, “It is time to ask the question that dares not speak its name (at least on options desks): are we witnessing the death of volatility?” Nicholas Colas, chief market strategist at New York brokerage ConvergEx Group, asked in a research note this week. “Are we so accustomed to central bank intervention that any negative macro action has an equal and offsetting policy reaction?"

In this post from April 11 of this year I noticed the same extreme.  But instead of coming to the conclusion that volatility is dead, I concluded that the time to be most fearful is when volatility appears to have died.  Volatility can go dormant in the herd but it is immortal; it can never die. Whe?  Because it is genetic.  Sooner or later a snake will slither in and the old fear will come streaming back like it had never left.  This is just how herds work.  My main themes from that post were:

• The VIX is supposed to measure volatility, period.  In other words, the odds that an unexpected rise or fall will occur.  But because of the credit pumped markets over the past 2 decades, the assumption has been that markets will always go higher and that trees will grow to reach the sky.  Because of this shift to the ridiculous bullish stance, the VIX no longer really tracks volatility to the up side.  Upside volatility is now an expectation. So when people refer to the VIX and to market volatility in general these days, they often call it the fear indicator.  Again, there is no fear that stocks will go higher, that is expected.  It is promised by every pension fund and insurance annuity provider which tells its investors that they will make, on average, 8% just by sitting on their asses and doing paperwork.  So the only fear that VIX refers to anymore is downside fear and downside fear is in a great depression.
• Buying options is supposed to be a sort of stock price insurance.  When people are complacent they do not buy insurance.  This is what the low VIX is telling us: nobody has insurance on their position.  Another way to refer to this condition is "extreme market participant complacency".
• The market is complacent because the federal reserve convinced the participants that it is omniscient and, more importantly omnipotent in all things economic.  If there is a market problem, the fed will handle it.  For several years now this has been called "the Bernanke put".  A put is downside insurance against falling stock prices.  Like other insurance, you pay an ongoing premium to protect yourself from catastrophe.  But if Bernanke (and thus Yellen) is going to handle any market downside with policy moves backed by the full faith and credit of the USA, why pay the premium?  Why indeed!  All it does in that case is cut into profits and those profits need to be maximized because pension funds are way underfunded and are not meeting their performance goals.

So this is the essence, the street-tech explanation of how many people will lose their retirements to the pump and dump debt Ponzi.  Their pension fund was losing ground and so it began taking on more risk in order to make up the shortfall.  Unfortunately, the risks are too high and the rewards are too low and so these guys will end up losing everyone's retirement money. 

Of course, that is a gross oversimplification.  What I really mean to say is that the retirement money is already gone because it was never there.  Market cap and share value does not equal real money.  Not in a Ponzi scheme.  So it is closer to the truth to say that the actions of fund managers will result in the loss of all the fake paper gains that never should have been recorded as sustainable profits in the first place and which were only possible through the credit based expansion of the money supply.  As the credit component of our money supply contracts, the money supply will contract and asset prices must fall.  This is simple math for anyone who will pull their head out of the sand and pay attention.  It must eventually happen no matter what the fed does because credit is 90+ % of our money supply.  This is the reason why the threat going forward is credit deflation and not hyperinflation.  We have to work down all that debt before hyperinflation hits the USD.

The only problem with this is that is is hard to know when the run on the system will occur and that is what people always want to know.  In other words, they can believe the logic that says it is a Ponzi but they will foolishly stay in it as long as possible because they want to get something for nothing.  Greed runs the show until fear shows them the folly of their ways.  They think they will be quick of thought and fleet of foot when the time comes to head for the door.  But there are a lot of market participants out there with the same ideas and so that is why I stopped putting money into 401ks a long, long time ago and instead just buy gold and silver coins when I think we are near bottoms in them. 

Anyone in the stock market is a gambler whether they know it or not.  Anyone in gold and silver can have the dollar price of metals go down but not likely the buying power.  If gold drops to $600, the average house in the USA will be $60k again.  I'll still be able to buy the same retirement with my gold and silver regardless of any potential USD drops in the price of bullion coins.  Sooner or later the entire global economic system will implode and there will come a time when only those with food, gold/silver, guns and lead to shoot from their guns will be in good shape.  I think it will happen within my lifetime because I think it has to happen before all the boomers, who were herded (by the government) into their government controlled 401ks, will need to make retirement withdrawals.  The collapse of a Ponzi always coincides with the advent of net cash outflow from the system.  That is when the patsies get the Madoffian bad news that the value that they thought was being stored for them in the system is in fact not there and in fact never was.

And no, it won't be different this time.