NEW YORK (TheStreet) -- After the first seven-day decline in the Dow Jones Industrial Average in four years, the talk on financial TV is all about the coming correction (but only in the context of a continuing bull market).
Meanwhile, the short-term view from the decision support engine is that the Dow at 17,300 is poised for a bounce lasting from several hours to several days.
Of course, this is the short-term view only, as the bigger picture for the stock market, according to the DSE, is for several quarters to several years of dramatically falling prices -- and not in the context of a bull market correction, but in the context of the biggest bear market of the past three decades.
So, regardless of whether the bulls can circle the wagons into the close today, or even early next week, perhaps even getting one stock index to a new high while the others lag in divergence, the Federal Reserve-induced party of the post-2009 leveraging environment is over. With one or two rate hikes possible in this year's second half, the Fed is planning on how to catch up to the reality of rising rates, which were detailed in an analysis earlier this week.
Here's what should rally in the next few quarters to years: fear! The monthly bar chart of the CBOE Volatility Index, or I:VIX, shows a similar pattern to that leading up to the explosion of volatility (fear) into the 2008/2009 financial debacle.
Although some of that debacle was engineered away, and masked by rising asset prices, the leverage in the system has reached (as Donald Trump pointed out Thursday night) $19 trillion in America alone. Add what the other global debt-mongers have generated, and the amount of debt the world is swimming in has become, for all practical purposes, unpayable.
The similarity of the yellow boxes, which was followed the first time by a VIX move toward 90, should cause investors to ask the DSE question, "If I had no money in this (VIX) market, would a buy or sell action be indicated here?"
Buying Vix contemplates an increase in volatility/fear and a decline in stock prices in general, while selling the VIX contemplates a decrease in volatility/fear and a rise in stock prices in general. Note the rising bottoms in the VIX's stochastics over the past four years, while the VIX declined to lower and lower levels. According to that portion of the DSE's algorithm, that's a bullish divergence buy signal.
This week, the VIX reached the high 10s, which is only a point above the high 9s, which is the lowest level of the past decade. It was held up by the lower two-standard-deviation band, which contains 95% of normality. The same thing happened in mid-2008.
Contemplating that VIX will remain near historic lows (meaning historic extremes in complacency and fearlessness) while stocks are at their historical highs in price and valuation, as investors are at their historic extremes in margin borrowing to buy stocks, can be described only as epic arrogance.
Furthermore, the market has historically taken every previous scenario like this to teach the crowd the meaning of humility.
In the markets, humility is never taught by rewarding epic risk assumption by the majority. Therefore, the current conditions just described should lead the "prudent man" to expect a substantial rise in VIX/fear, which is highly correlated with substantial declines in stocks.
DSE strongly warns that sell actions are not indicated here in the VIX itself, because buying actions are! That means buying volatility/fear (or selling stocks) is optimal.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.