Friday Night Reflections: Groundhog Day

| About: SPDR S&P (SPY)

Summary

In the immortal words of the great Bill Murray, "Well, it's Groundhog Day... again."

Just look at Friday. Yet another senseless tragedy in Europe, and we closed green. As for the VIX, you might as well just "mark it zero Smokey."

This market needs "a good hard slap in the face."

In the immortal words of the great Bill Murray, "Well, it's Groundhog Day... again."

If you haven't seen Groundhog Day, you've committed a crime of omission that I suggest you rectify at your earliest convenience.

In the film, Murray, who plays an arrogant weatherman, finds himself reliving the same day over and over and nothing he does can stop it. He even tries committing suicide. Nothing works. As he tells Andie MacDowell in one famous scene, "I didn't just survive a wreck, I wasn't just blown up yesterday, I have been stabbed, shot, poisoned, frozen, hung, electrocuted, and burned. I am a god."

That's a lot like this market (NYSEARCA:SPY). We wake up every single day to the same headlines and the same commentary ("wake up boys, you're playing yesterday's tape") and no matter what happens, the rally continues.

This market didn't just survive Brexit, it wasn't just hit with $27 oil in January, it's been stabbed with the collapse of the US shale complex, shot by an increasingly poisonous geopolitical landscape, frozen by a Turkish military coup, and burned by an epic devaluation of the Chinese yuan. Nothing doing. This market is a God.

Just look at Friday. Yet another senseless tragedy in Europe, and we closed green. As for the VIX (NYSEARCA:VXX), you might as well just "mark it zero Smokey."

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Consider the following from Goldman which earlier this month said exactly what I said above only in a way that's not nearly as fun to read:

On July 3, 2014, the VIX hit 10.3, S&P 500 atm implied volatility was 8 and cross asset volatility levels hit record lows. Average VIX levels for 2014 were 14.2, the low so far this cycle. Fast forward two years and markets have witnessed an historic energy swing, China devaluation, U.S. recession concerns and Brexit, yet the options market is currently pricing options below 2014 average levels. S&P 500 implied volatility levels are back near cycle lows not only for shorter-dated 1m options but across maturities. Low vol may be an opportunity for investors. For investors who want additional upside exposure, S&P 500 1m otm calls look attractive at a sub- 10 vol. For hedgers, skew has collapsed as investors have rolled off hedges and 1m otm puts are back near cycle lows.

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Crazy, right?

It's all the same narrative: don't fight the central banks. Thursday's Kuroda tape bomb was proof positive that this isn't going to change any time soon. When you wake up each morning, the only thing that matters in terms of overseas markets is what BoJ officials did or didn't say, whether China did or didn't intervene, and whether any ECB officials said anything of substance. "Wake up wood-chuck-chuckers, it's Groundhog Day!"

Next week, we'll get Yellen and Kuroda. Well, not really. We'll get Kuroda, but this is a "no presser" Fed Wednesday, which basically means it's not a live meeting. If it hiked at a no presser meeting, whatever floor traders are left on Wall Street after the rise of the machines would rent eight Winnebagos and storm the Eccles Building.

There's a full central bank event preview here, but consider the following "inconvenient facts" with which the Fed must cope, via BofAML:

The business cycle is more volatile than they had thought and the risks of deflation and hitting the zero lower bound on rates have risen sharply.

For the first time in the modern era, the Fed goes into the later stages of the business cycle with very low nominal rates. Taking any risk of a recession today would be very dangerous.

The Fed is starting to lose the inflation expectations battle-both surveys and market measures have dropped sharply in the last two years-and restoring them likely requires a period of above-target inflation.

Other central banks are very low on ammunition so the Fed may have to fight the next recession with very little help.

With respect to that last point, I would refer to BofAML's own charts and respectfully ask the following: "where exactly do you see spare ammunition at the Fed?"

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(Charts: BofAML)

This is something I've warned about for quite some time. No one has any counter cyclical breathing room left. In the BoJ and ECB's case, they've gone completely off the reservation. Not only do they have no counter cyclical slack, but also they've got negative slack - both figuratively and literally.

Anyway, as we head into next week I have to say, to continue with the Groundhog Day theme, markets need a "good, hard slap in the face."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.