Here it comes again. Another call for a Trillion dollar company. I couldn’t help but spot this article that discusses the possibility of Google reaching $1 Trillion in market capitalization in the future.
By now, you know how I revel in irony.
They never learn!
It was back in the hey day of the dot com bubble that Cisco was going to be the first trillion dollar company. More recently Apple was going to hit the mark. Today it’s Google. Oh boy, here we go again.
By the way today’s video analysis can be found here.
We, as humans normally fail to realize extremes while were in the midst of them, but if you keep notes, mental or written, you would know that these are the things that always seem to rear their ugly heads just at the wrong time.
Take for example the LA Clipper’s being sold for $2 Billion to Steve Balmer, the former CEO from Microsoft. He can’t believe for a minute the team is worth that kind of dough, but he has too much money and simply wants to seize the opportunity to acquire a professional sports franchise. After all, many other billionaires own teams, and he wants into the club.
Nice to see capitalism prevail, even though the NBA has the power of a totalitarian regime.
So for him, it’s OK to overpay and he’ll simply justify it as part long term investment and part entertainment.
The problem for everyone else is that he has now re-set the bar, and it’s too high.
Cisco, Apple, Google and now the Clippers are all examples of sentiment extremes. People believe just because something continues to increase in value, it will keep going. Based on history, it only happens until it doesn’t.
So what do equity (stock market) traders think about the stock market, extremes and what does their crystal ball look like?
Many traders keep one eye on the VIX, one finger on the sell button and one foot out the door, at least these days anyway.
The VIX is also known as Wall Streets fear gauge. It’s one of the best forward looking indicators the market has.
What is it, how does it work and why is it important?
The VIX is a predictor of future volatility of the stock market. Volatility is Wall streets secret term for a down stock market.
So the VIX is a measure of future bets in the options market. The more put options being bought for the future, the higher the price would go (supply and demand), and thus the price of the VIX would increase.
It’s sort of the chicken or the egg debate. The stock market goes down, the VIX goes higher. But which one occurred first? Where people buying put options that caused the VIX to rise and the market to fall, or did the market fall first. I defy anyone to prove it’s one or the other. I’ve been working on this one for 20 years and I’m no better off today as I was then.
On paper the VIX is much more complex than that, but we don’t really care about the miles of calculations they use to come up with the price, we just care what the stock market is going to do.
(side note: Most people who trade options lose money, so don’t trade options)
Enough with the technical mumbo jumbo. Why is this all important?
When anything is priced at a historical extreme, under normal circumstances it makes sense that probabilities are the risk would be a move in the other direction.
Right now the VIX seems to be at an extreme. It’s ironic how the wall street crowd wants to see higher prices at the precise time I see a VIX that doesn’t seem like it could get much lower. If higher stock prices means lower VIX prices, one of us has to be wrong.
Take a look at the charts below.
You can see on the daily, weekly and monthly time frames that we are currently at an extreme.
Of course, you have analysts, money managers, pundits on TV and anyone else with a vested interest in the market still making the case why stocks have to move higher.
That’s fine, and that’s what makes a market, two sides.
Right now, I would rather look at it from a common sense perspective.
Now without a lot of analysis, doesn’t it look like we’re at a low? If we’re not, it should be getting close. This is one of those common sense items I always refer too. If the market goes down, the VIX will go up. When things are at an extreme, don’t they normally revert in the other direction to normalize things?