S&P Vix Ratio Update
by Jes Black
October 8/04
Stocks failed to hold their early gains, with the NASDAQ leading the decline. Today’s payroll number will surely claim the headline on most business reports, but the news is hardly that surprising.
US indices are now in synch to the downside and our only safe haven at Black Flag has been to be invested in foreign stock markets in order to take advantage of the falling dollar. In fact, we added to our positions today.
Now take a step back for a moment and consider that amid all the debate over job creation, the vast majority of scrutiny has failed to focus on the root cause of our malady.
Simply put, we are in the beginning stages of a post-bubble economic downturn. The only other comparable times to now are the early 1930s and the late 1960s.
So in relative terms we’ve got a roaring success here. Unfortunately, much of the success is due to an “infinitely elastic” currency which has swollen the US with debt.
But since it’s near impossible to time the market with a macro view, let’s get back to today’s action. Recall that one week ago we highlighted the S&P 500 divided by the Vix and pointed out that this ratio was testing its all time high of 87.50 reached in August 2000 right as the bear market got going.
Since we wrote that first research note one week ago, the ratio has turned
down and today has broken the uptrend line from the August 2004 lows.
Recall that each time this ratio has crossed above 80 and then fallen
back below that mark, the market has turned sharply lower.
I am also intrigued by this ratio’s “five wave” advance
from the 2002 lows. If you consider that Elliott Wave seeks to label a
pattern of human emotional swings, then using the Vix’s ability
to gauge relative fear and greed can be enlightening. As such, a completed
five wave advance is terminal and we now have further evidence that job
creation is not coming back strongly. This may give an added boost to
John Kerry which in turn could weigh on the markets.
Investors were already skating on thin ice this year and I believe that
what we have here is the possible (stress possible) recipe for a major
downturn in the market if this payrolls report did enough to damage the
nation’s confidence. If not investors should continue to focus on
foreign country ETFs as many of those we concentrate on continue to outperform.
Jes Black, hedge fund manager at Black Flag Capital Partners, specializes in foreign exchange and global macro trends. Prior to organizing the fund he helped MG Financial Group launch Forexnews.com. Afterwards he went on to found FX Money Trends, a research firm catering to professional traders.
Mr. Black holds a degree in economics from the University of Kansas and
an MBA from the ESC in France. His market commentary is often featured
in the Wall Street Journal, Financial Times and Reuters. He has also written
numerous strategy pieces for Futures magazine. To find out more about
the fund’s research letter visit www.fxmoneytrends.com. Qualified
prospective investors can find out more about Black Flag Capital Partners
by e-mailing info@blackflagfund.com
Jes Black
FX Money Trends, LLC
One Henderson Street
Hoboken, NJ 07030
646.229.5401 Tel
201.222.5577 Fax
www.fxmoneytrends.com
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