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Market Lab Report - Premarket Pulse 10/2/17

Major averages closed near the top of their trading ranges to new highs on higher volume. This is noted by the action in the Russell 2000 which has been outpacing the other major indices as of late. The market believes the Trump tax plan will spur the economy based on corporate tax cuts and could cause a tidal wave of internationally held cash to flood back into the US. The repatriation tax holiday incentivizes US-based companies that do big business overseas to bring those profits back home. As much as $250 billion could be repatriated, not an insignificant amount.

But that does not mean all is wine and roses. The VIX is heading back down towards all-time lows. Complacency has been growing as shown by record levels of short interest on the VIX which suggests investors are convinced market calm will persist, thus willing to take on more risk. The majority may fail to realize the strong mean-reverting tendency of uncertainty judging by the new record short in VIX futures, extending last week's surge.

Unsurprisingly, the majority is always caught on the wrong side at major inflection points, not because the crowd is always wrongly positioned. The crowd can be right for a time, however as extremes become more extreme, more of the crowd piles on thus by way of human nature, the crowd will always be wrong at major turning points.

And when the market turns, the VIX will spike as will the UVXY. Keep a close eye on the UVXY 620 as an entry guide. We discuss it here:


It is an intraday signal that can turn on a dime. The lower the VIX goes as it breaks to all-time lows, the greater the odds of a correction.

Nevertheless, QE is the dominant factor in record low levels of the VIX. Despite some who say QE is past history since the Federal Reserve ended QE back in 2014, what counts is the total aggregate QE by all the world's central banks which remains at all time highs. This explains how central banks are now the majority shareholders in some of the most liquid stocks. It also explains how the market has been unable to correct in any meaningful way all year. Indeed, the S&P 500 has corrected the least amount since 1914. 

Equity futures showed resilience in the face of the deadliest shooting in U.S. history, killing more than 50 and injuring at least 200 others. The tragedy occurred last night on the Las Vegas strip. The alleged gunman, who has not been connected to any militant groups, fired upon a country music concert from the 32nd floor of the Mandalay Bay Resort. Futures remain mildly higher.

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