This will likely be my last post of 2012, barring an "event". So I tried to come up with one chart that sums up the overall zeitgeist of this surreal year. I haven't shown the above view in a while, so I felt that this was the perfect chart to capture exactly how fucked up and dangerously far removed from reality this year has been...
The key takeaway from this chart is that during these past four years there have been multiple divergences wherein the stock market rose significantly (red line), accompanied by a fall in the Vix (black line), which were then "corrected" by a fall in the market and a rise in the Vix (options volatility fear gauge). After each "event", Central Banks came along and applied yet more monetary "stimulus" (aka. dopium) to the markets to again levitate them to even higher highs and corresponding complacency.
We notice, that for all of 2012, unlike the past few years, there has been no convergence or "correction" to alleviate the pent up excesses or otherwise tame the animal spirits. The last major sell-off was all the way back in October of 2011. This high level of bullish giddiness and complacency is of course in no way grounded in economic fundamentals. What's more, this detachment from reality has given rise to an undue amount of optimism and false bravado, mostly notably pertaining to this fiscal cliff political debacle. Recall that the crash shown in the middle of 2011 (above) was precipitated by the debt ceiling political fiasco which played out identically to how the fiscal cliff is being handled - a lot of political brinksmanship, a U.S. debt downgrade, finally a deal, and then the market tanking from exhaustion - i.e. the market rallied into the bad news and sold off into the good news.
I therefore leave to the reader to ponder the ultimate market outcome of the fiscal cliff saga, given the current disposition of risk/reward as pictured above to the far right. Generally speaking the last week of the year is usually higher aka. "Santa Claus" rally. I'm all for Santa Claus, however these rallies are invariably a result of Wall Street marking up the books at year-end to boost the bonus pay packet. Of course, this time of year, the market is easily manipulated using leveraged futures, facilitated by holidays and low volumes. Clearly though, if we get a continuation of today's sell-off next week, it will get fugly big time, ironically for all of the same reasons - low volume, ease of manipulation, bonus panic etc...
For now though, I will put all that aside, and sincerely wish everyone Happy Holidays !
