BEARISHNESS WITHOUT NERVOUSNESS
John Hussman’s excellent weekly letter touched on a topic that I have been meaning to discuss in recent days – the lack of nervousness in the market as evidenced by the VIX. It’s now obvious that sentiment was overly bearish two weeks ago – to the point where we were seeing very historically low bullish levels among investors. But what was not discussed is the continuing decline in the VIX (via Hussman):
“An important part of last week’s advance appeared to be a simple “clearing” of the a short-term oversold condition in prices and bearish sentiment. While the recent increase in bearish sentiment might have deserved something of a “clearing rally,” it is notable that we’re observing what might be called bearishness without nervousness. The chart below presents the Investors Intelligence bearish percentage versus the CBOE volatility index (VIX), which is often viewed as a “fear gauge” for the stock market. Historically, increases in the level of bearishness early in a market downturn are often both accurate and persistent, as we observed all through 2008 and in many past market cycles. It’s difficult to look at the evidence and conclude that investors are excessively bearish, much less terrified here.”
If investors are scared right now they don’t appear to be putting their money where their mouth is….
I might see it more like the period from what looks to be 7/8 to 10/8 on the graph, where bearish sentiment rose while vix remained benign. The vix does not appear to necessarily always be a leading indicator.
IMHO anyone who is not scared right now has no idea of what is headed our way inside this next year. Just total up a list of all of the major issues facing our economy, and such a list was posted about a month ago on several sites (ZH for one) listing 50 major current issues. Then take into account that any one of the G20 could go into default or something very similar; which country it happens to first really will not matter, as that will just be the beginning of the avalanche. Everyone knows that Greece for one has about zero chance of getting through the next 6 months without some form of default ( restructuring,whatever). Does any rational person believe that it will stop with Greece. I know that Dylan Grice, Albert Edwards, Hussman, and a whole group of others don’t think it will stop with Greece. I am not frozen with fear, but I do have the fear of respect for the power of the wave headed our way.
Give it a month or so, the Vix will be high in the 30s or 40s, something in Europe will give soon, revolution in Greece, or PIIGS debt auctions failing, runs on banks.
Something will happen, they don’t have any fingers left in Europe to plug the holes in this huge mess.
xactly what i’ve been saying all along. It’s a long term bear so different rules apply.
In short, I would describe the present investment enviornment as: the calm before the storm(s).
I still say it is more like we are in the eye of the hurricane (waiting for the rest of the storm to reach us). But we sure seem to have been in it for a long time.
The potential for such a dynamic actually occurred to me a couple weeks ago:
“Think of a world without panic. All despair, but no panic.”
http://trendandvalue.blogspot.com/2010/08/spycashus.html
If and when the market breaks some meaningful support I’m sure we’ll get a decent VIX spike, but it won’t last long. In fact, it would not surprise me to see the market drop like 50 per cent from here with the VIX never piercing above 40~.