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While the hearts and minds of the obvious are getting all beared up, volatility continues to break down. This week’s crash in the VIX was a critical one in our macro model, and it should not be ignored.

The VIX was down -17% on the week, following its -9% week over week fall in the week prior, taking its 2-week crash to -26%. This is why the shorts are being squeezed most materially where they were making most of their money in the months prior – small caps.

This week alone the Russell 2000 had a +3.8% move. With the larger cap Dow being a proxy for “liquidity”, and closing down -0.6% on the week, the real liquidity needed in the US market place was that for the shorts to cover in illiquid small cap shorts.

Everything that matters in our macro models happens on the margin. On this margin, volatility is declining at an accelerating rate, while positive breadth continues to expand. If you add some volume to this Christmas cocktail, you have yourself a relative performance party that few can afford to miss.

Our breakdown level for the VIX is now $51.15 – see the chart below – that’s the bear hunter’s bulls-eye, where support has quickly morphed into stiff resistance for a growing community of consensus bears.