One would think that as we approach the most important event of the week, and perhaps the month, namely the latest FOMC announcement due in just over three hours and one which is expected to confirm that rate hikes are back on the table, something which a few months ago unleashed another round of teeth crushing volatility, that the VIX would be higher.
Not only is it not higher, but instead as the chart below shows, the VIX has just tumbled by 6%, to fresh 2016 low, and a level not seen since mid-December.
We were looking for a catalyst... and then we stumbled on Gartman's latest letter, released overnight, in which we read the following...
Concerning position taking, we have been equivocal this past week about share prices, but our equivocation is now shifting bearishly. We continue to find the fact that the rally of the past month and one half has been on decidedly lesser volume than was the volume on the downside. Note then the chart this page with the rising and falling mini-trends of volume in the S&P futures highlighted, noting that volume reaches its nadirs at market peaks, and reaches its peaks at interim market bottoms.
Volume should follow the trend and if that is the case then the market is exhibiting manifestly bearish tendencies and it is time to act upon those tendencies. Given the low level to which the VIX has fallen, we are buyers of the VIX this morning upon receipt of this commentary.
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NEW RECOMMENDATION: As noted above, we are taking a “punt” on the short side of the equity market, but this time we shall do so by buying volatility; that is, we shall buy the VXX volatility index ETF listed on the NYSE and we shall do so upon receipt of this commentary and the market’s opening. We’ll have a stop in tomorrow’s TGL, but for now we do not wish to risk more than 5% on this trade… a rather large stop to be certain for our purposes in the past but we’ll tighten that up measurably over the course of the next day or two.
This is unusual action on our part ahead of an FOMC meeting given the historical tendency of equities to rise after these meetings; but call it trader’s intuition or call it what you will we think a “one unit” punt is warranted and reasonable.
We must admit that we pray that for once Gartman's "trader intuition" is correct because we tend to agree: we have gotten to a point where complacency is fully back courtesy of the central bankers, where the market is substantially overvalued as even Goldman admits, where the earnings picture continues to deteriorate (Q1 EPS is expected to plunge by over 8%) and where none of the world's problems have been "fixed" in the past few months yet where central banks have once again merely "kicked the can" with even more stimulus and more negative rates, while China's debt bubble and proposed "debt for equity" swaps are now beyond rational comprehension.
Then again, it is Gartman...