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My Take On The Real Reason The Stock Market Dropped – Mike Swanson (02/07/2018)

Over the past few days we have seen some wild swings in the stock market and several explanations for those moves are dominating the news, but I think something more could be going on.

Whenever there is a big move in the stock market as it happens people look for an explanation and the media’s job is to give it to them. The reporters on CNBC and the other shows can’t wait to have a solid story, but instead must deliver instant explanations for events as they are happening in real time to explain the market moves.

One obvious event is the wild collapse in some of the VIX ETF’s, such as XIV.

The XIV is one of those ultra-ETFs that uses futures and options to make a massive bet.

Here is a detailed article on what happened with it:

Short Volatility Armageddon – The Bear Traps Report

In this case the XIV ETF is always betting against the VIX – the volatility index – and it became a very popular thing for people to buy last year.

As you can see the chart price went straight up and people love to chase.

But last year we had record low volatility and one day that was going to change.

And with so many people long this ETF they dumped and wild things happened with the VIX itself.

And so this ETF simply crashed so bad and blew up that it is now being set to be shut down for good. People are going to get a few dollars a share for it and it’s going to cease to exist.

Yes that’s a disaster and it made a lot of news, but I doubt that is the cause of the stock market drop.

There is a claim that there is a group of people who were short the VIX with these ETF’s and going long the stock market and just got blown out.

But there is no real evidence that such a group of people exist in a size big enough to impact the stock market.


Another cause for the drop being talked about is inflation fears.

In this notion the economy is growing so fast that inflation is going to jump up and cause the Fed to raise rates four times this year and cause the stock market to dump.

In reality there really are no signs at all of an inflation boom.

Oil prices look toppy to me again and last week’s commitment of traders report shows that there is a MASSIVE short position among commercial hedgers and producers on oil that is now at record size surpassing the previous record set early last year and in 2014.

I mean it’s MASSIVE and it would not be this big if the oil producers thought oil was going to go up in a meaningful way.

That means they see no sign of inflation and on the drop energy stocks were actually the worst performing stocks.

Look at the XLE ETF.

I also am skeptical of the idea that a fear of inflation and higher rates is hurting the stock market at this point, because the number and pace of the rate hike odds have sharply fallen in just the past few days in the Fed Fund futures market.

Sure maybe there were some people worried about this last week, but really they have no reason to worry now after the rate odds dropped. So I see the inflation fear theme not as “fake news”, but as old news.

The point is these are the two explanations for the drop now dominating the media and I don’t believe them.

I think something else is going on and that leaves us with two possibilities.

The first is that this is just a simple correction that happens from time to time in the markets when they just drop 10% from a high usually once a year. It might not even be over. We could see the market go back down soon and even break the recent lows set yesterday before the month is over.

But it’s just a simple correction and whenever the market makes a move that surprises people there is always a search to connect news stories to explain the market action even if it was just going to drop at some point no matter what and that’s the real story.

We saw the market go up for almost two years without pulling back and just the other week the investors intelligence survey showed that sentiment got out of control with a record low number of bears.

No one was worried about the market and it was just time for a pullback.

The other possibility is that this pullback is actually the first shot in a major stage three topping process that will lead to a new bear market later this year.

One sign that this may be true is the simple collapse in Bitcoin as it became the most speculative part of the financial market and has crashed as the Bitcoin cartel has lost price control.

I cannot tell you which of these two possibilities is the answer and I’m not going to pretend like I know or act like I’m predicting the future, but in one of them lays the reason for the drop.

But that’s ok.

Right now either way I do not expect we’ll see some giant crash in the markets anytime soon, because stock market tops are a process.

So there is no reason to be scared right now (unless you are on fully margin or doing something crazy).

And we can watch things develop this year to see more signs that a real bear market is coming to be prepared. This is a topic I went into detail this Sunday in a private Power Investor group update and am going to talk more about it this week with a position I have 20% of my money short in and on what I think is really going to happen with gold here. I am now ony opening up the group a few times a year for new members so if you are not a member and want to get in you need to get on the reservation list.

But with the stock market no matter whether this is now the start of a topping process or just a 10% dip in a bull market I expect we’ll see this market take a few weeks to stabilize and there will be a rally either way so there will be a chance to buy things in a good spot.

Perhaps in that case it’s best to be patient and let the market swings play out and to settle down and then be optimistic about the future and guarded at the same time!

You just go with the flow and let the market unfold and tell us where it is going. Daily action rarely can tell us that and a manic swing almost never does. You have to look at things week for week for signs of changes. And the last few days may be surprising and they may be a warning for the future, but they in themselves are not signficant changes in regards to overall market trend, although they are for volatility as the VIX shorters got destroyed!

Wow XIV going away even quicker than Bitcoin!

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