Panicking More Quickly

The US stock market behavior has changed since 2008.  The jumpiness of the VIX has increased dramatically.  A look at the numbers since 2007 show that during the first big correction in 2007, on August 16, the VVIX closed at 142.99.  In the height of the financial panic in 2008, the highest VVIX close was 134.87 on October 27.  In 2009, it never closed above 105.  In 2010, a couple of weeks after the flash crash on May 20, it closed at 145.12.  In 2011, during the middle of the European sovereign bond crisis, it closed at 134.63 on August 8.  In 2015, the VVIX hit a record close of 168.75 on August 24.  In 2018, the record was broken on February 5 when VVIX closed at 177.34, after hitting an intraday high of 203.73.

It is quite telling, that even during the biggest bear market of our lifetime from 2007 to 2009, the highest VVIX close was 142.99, while milder corrections in 2015 and 2018 resulted in much higher VVIX readings.

It struck again when the VVIX jumped up to 147 intraday last Thursday as the SPX hit 2712, down just 7% off all time high. 

These high VVIX readings this year is an indication of how offsides the investment community was in regards to SPX downside risk.  The fund managers have been lulled to sleep over the low VIX readings since May.  It takes time for them to adjust to the new volatility regime, more than the 7 days since the beginning of the selloff from 2925 on Thursday, October 4.  It has been 7 trading days since.  Usually for big drops like this, it usually takes at least 12-13 trading days for fund managers to hedge themselves and lower risk to adjust for the higher volatility, and for weak hands to get stopped out.  So this should be another week where bounces will be brief and sold quickly. 

As I writing in premarket, the SPX is already over 20 points off the close on Friday, on no news, and negating the intraday reversal pattern.  It was a fakeout reversal on Friday, a combination of short covering at the close and eager bulls piling in hoping to catch the bottom.  I am still looking for 2680-2700 area as a buyable zone, but with the recent jumpiness in this market, and the herdlike behavior of the systems traders, I won't rule out a monster flush out towards 2600.  This is no longer the kiddie zone of the pool.  We are in the deep end, sharks are lurking waiting to feed on the weak handed fish.  Right now, the longs are the fish.  Next week, it probably will be the shorts.

With the big gap down on a Monday, I do expect intraday day buying off these levels from short term traders which likely pushes the market towards the Friday close of SPX 2767.  If SPX is below 2767 by 3:00 PM ET, then we'll probably see a weaker close as traders will want to lower long exposure ahead of overnight risk, and the sell bots will swarm this market back down towards the 2740s. 

SPX will have trouble going above the Thursday highs of 2794 this week.  It is still safer to sell the bounces than try to buy the dips here.  The selloff has not fully matured yet, give it another 5 trading days and we'll reevaluate where we've hit bottom then.