Slow Boiling Bull Frogs

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PREFACE FROM TIM: The spiffy new site is absolutely crushing our server pool, so slowness (and occasional downtime) have been happening this morning. After the close today, we are going to VASTLY expand our server pool, so please don’t be shocked to see Slope completely down. I promise that no harm will come to your computer, including spontaneously bursting into flames. Just keep being patient, Slopers!

The following is part of the Market Sentiment segment of this week’s edition of Notes From the Rabbit Hole, NFTRH 498. I’ve given it a funny name that would be less funny for a lot of people if the scenario actually plays out.

Slow Boiling Bull Frogs

Last week we reviewed Commercial Hedgers data that was bullish for the stock market and other sentiment data points that were not. The picture was mixed and our view was that a bounce (to short into, if you are bearish) was likely.

Refining that a bit, we reintroduce the ‘M’ retest possibility. It’s not a call or even a favored outcome since the stock market is still generally below markers like the SMA 50 and a series of declining highs. But as Apple showed us last week, this pig can scream higher at any time that animal spirits get unleashed.

One problem for longer-term bulls is that unlike the big, ultimately bullish event in 2015-2016 today’s SPX has not seen a corresponding rise in the VIX as the market has declined. The off-the-cuff interpretation of that is complacency that is out of whack with the flat to negative price action over the last several weeks.

spx, vix

The VIX did after all, drop hard to hit the daily SMA 200 (chart below). We had been allowing for and even expecting that possibility.

The point being a question: How much lower can the VIX go while the bulls rally? Anything can happen short-term but this lack of anxiety as expressed in the VIX is not bullish for the stock market.

Indeed, it sends my thoughts to bear markets past, when these wondrous rallies would take place, killing the shorts for a day or two but actually helping to slowly boil the bullish frogs floating in the pot. This is not yet a confirmed bear market but this is behavior reminiscent of the 2000-2002 bear market. I remember it clearly. It was manageable and tradable, unlike the thing in 2nd half 2008.


Let’s look at it from another angle; namely the entire SPX/VIX relationship from the late January blow off on. Up is now shown as down on the SPX to match it with its running mate, the VIX. SPX topped on January 26 and its inverse tracked the VIX very well during rallies and declines until late March when the VIX began easing off track.

This plays into the boiling frogs analogy. When the correction erupted out of nowhere* in February investor alarm erupted right with it and drove the VIX proportionally. But since that 1st shot across the bow investor behavior has settled down even though stocks are much closer to the February lows than the January highs. The frogs are content with the situation they are in right now.

spx, vix

* Well, it actually came out of somewhere; namely a manic mini-blow off amid rabidly over bullish sentiment and epic entry into the market by new investors chasing the Trump reflation bull (recall the record openings of new discount broker accounts in Q4 2017).