THE #1 REASON TO BE SCARED RIGHT NOW….
The fact that no one else is. The VIX is fast approaching levels that are consistent with very high complacency. I know, stocks don’t go down, the economic recovery is here, it’s a “win win” market, etc. But the VIX sinking below 17 is a sign that investors are increasingly confident removing hedges and leaving their portfolios exposed to greater risk. Many of of the most brutal sell-offs in recent years were accompanied by the exact same environments – government had intervened to save the economy, all was well in the world, and on and on. The market has a way of fooling the majority of investors the majority of the time. Right now looks like a good time to be hedged – not necessarily because you’re bearish, but because it’s the contrarian play….
an even more interesting chart is that same one, but extended to the max of 1990…
there are 4 distinct trading bands I see on that chart
1) vix 10-15 (93-97) – about as low risk and good an environment you have have for stocks – the sweet spot of the secular cycle
2) vix 15-45 (97-02) – the later stages of the bull when global imbalances reared their head, followed by the 00-02 bear
3) vix 10-17 (03-07) – another lower risk, bull environment where the Fed stretched the debt cycle out just a while longer
4) vix 15-50/90 (08-09) – no need to state the obvious
we’re at major historical support now at ~16 – the produent quetsion here is the following: are we in an environment that is indicative of a vix 10-15 band or are we still in the midst of a higher vix environment. in the context of none how severe some global imbalances seem at this VERY moment, i’d say we’re still in the higher band. as such, this would seem to be the inflection point.
B Ferro:
You are making a rookie mistake in treating the VIX as an absolute. It is a RELATIVE measure. The VIX is depressed relative to its 10 day moving average, not to where it was 10 years ago.
Ed – I understand the difference but thank you.
Might want to check out a longer history on that chart… VIX historically has been (and can) go quite a bit lower, which, of course means we rally further.
The only thing I know i that every site I look at is posting about how bullish the masses are, and cautioning that we should not be in this mkt. So, we’ve probably got higher to go yet, because the news website and gurus are all warning us to stay out.
We are still far off lowest vix level that occured after the internet bubble while the subprime scam was being built. Complacency is like stupdidity : it has no limit
when looking at VIX you need to know what drives the vix.. implied vols of the spx. what drives implied vols of SPX? Real quick one can say two factors.
1- realized vol of the underlining
2- supply and demand.
if you look at the spread of realized and implied its usually about 6 points this is the supply and demand sided. As of now the spread is about 4 depending what time frame you look at for realized. But in any case, the point is that VIX is coming in because realized has been coming in, witch lowers options implied vols…
Seems like there are many credible leading indicators, Shanghai Composite, Dr. Copper, VIX, bullish sentiment, and so on. Does anyone know if any particular leading indicator has historically led other leading indicators? And how has a rising bond market historically played out with equities?
Put/call ratio is ridiculous low, and lower than the past few days now.
I recently read that the ten day moving average of the TRIN is at its lowest level since 1956. That is a lot of buying power that has barely moved the stock averages over the past ten days. Getting pretty scary to me and time to step back and just watch what happens next.
Complacency and the vix don’t always have the same correlation as indicated by the article. Everyone is so relived by the tax deal in the works, at least the investing public, that the market is liable to explode upwards for a few months. After mid June of 2011, all bet are off the table as everyone will be living in euphorialand.
I just follow then direction of the price of oil. Since oil backs the dollar because oil is sold for dollars and stocks globally track now you can see a strong relationship between the dollar, oil and stocks. If you had simply used the oil chart you would have sold out of stocks or gone short on stocks and oil and bought back in on the March lows-simple. Oh and our troops keep it that way for now and gold and silver have been much better investments for the last ten years. The globalists are mostly the old oil bankers after all and they have run things including Wall St. for a long time. The big players move the markets now and it’s better to go with the flow than fight against the current.
Be careful when others are Greedy and Greedy when others are fearful wise words from Warren Buffett.
I sold out a lot of my positions especially gold silver and in now more Agri. stocks.
When a very large percentage of investors are bullish it simply means that they are fully invested in equities. In simple terms, there are fewer buyers left to drive the market higher. I also noted that margin debt is approaching dangerous levels. We are in a strong seasonal period for stocks, but everyone knows that already. I prefer to get in early and out early. Chasing momentum in the market and ignoring fundamentals will eventually lead to financial ruin.
“When a very large percentage of investors are bullish it simply means that they are fully invested in equities.”
Good point. It is also beneficial to invert that thought- bearish investors may simply mean that they have been, and/or continue to be, underinvested in equities.
In hindsight, I went from hedging to increasing my shorts over the past 1.5 months, and I must reconsider that my bearish views of the overall economy, although valid, may be a result of taking the wrong side of that bet.
It is also important to remember that the stock market is NOT a true point-in-time reflection of the economy.
It is also important to remember to work in probabilities and not absolute with respect to forecasts.
I have been kicking around an idea lately in terms of just economically muddling through the next few years- if this was our base case, what would a situation like that mean for individual companies?
If demand is stagnate for the next few years, corporations will continue to refrain from investing and hiring; so, while P/E expansion may be lacking during a muddling-through phase, the ability to maintain a current levels of margins and cash flow is probable. Moreover, when you take into account excess cash on company balance sheets, many, many companies- esp. global large caps that are contuining ot stay cheap due to IMO exchange rate risk over the near-term- are still very cheap (Shiller P/E UNDERSTATES value, although optimistic forward P/Es are too optimistic overall if assuming stagnant demand growth).
What I keep coming back to is how the world reacted in 2008 when Paulson told the world that the Fed was ready to take unprecedented action, and then subsequently after Pelosi undermined the “bailout” vote aorund 09/18 or so by lambasting the bailout before the vote (and her vote for it). At that point, companies purged the rest of their excess labor and have ever since been ringing out other cost excesses. Put simply, the gov’t gave companies a “heads up” that the prior year (2007-2008) was no fluke, and rational business owners/decision makers took action more quickly than without such a historical warning. Today, these (non-financial” companies are lean and mean and should be able to maintain current levels, especially with tax, healthcare, demand uncertainties, as well as a continued PTSD. So, in this admittedly-myopic base case, the Hussman view that historically high margins are destined to go down- they should, but when the overall economy recovers, or absent that, when rising input costs and excess capacity weigh in on certain sectors). In this case, equities are a very nice bet. Exogenous shocks, outside of something like a Euro collapse, and sales growth dissappointments should continue to be viewed as definite buying opportunities as long as your investment horizon is longer than a few years and that you are comfortable with your individual undervalued equities becoming (much)cheaper at times.
Not sure if I am relating my thoughts well, but I would love to here what you guys think, espcially coming from the top-down POV.
You can only sweep so much under the rug before the rug isn’t touching the floor any more. Sooner or later people have to look at the rug and say “what’s all that crap under the rug?”
That’s when the flying mass of defication makes forcible contact with the fast spinning oscillatory air moving device.
Fans don’t oscillate. They rotate.
It’s not an all or nothing game. Sell a little, buy a few puts and trail stops.
The article’s first sentence said it all. And I’m sure we can all agree that the market abhors a vacuum.
WHAT DOES IT ALL MEAN AND WHAT SHOULD I BE DOING WIHT MY CASH IN BANK EARNING 1% OR LESS IN TAXABLE INTEREST== NEGATIVE EARNING- WHAT ARE THE BIG CORP. DOING WITH THEIR CASH IN BANKS? AND WHAT ARE THE BANKS DOING WITH ALL THE CASH OF DEPOSITORS? SEEMS TO ME ALL THE CASH PRINTED IS GOING TO CHINA, INDIA, JAPAN AND FOREIGN OIL PRODUCERS.
sO WHAT IS THE VIX TELLING US TO DO WIHT THE LITTLE CASH WE HAVE?? THE POLITATIONS TELL US TO SPEND IT TO STIMULATE JOBS, BUT WE NOT PRODUCE ANYTHING EXCEPT SERVICES THAT PAY MINIMUM WAGE SALARIES. THE MONEY IS GOING OVERSEAS TO PRODUCERS. I SAY BUY AMERICAN MADE PRODUCTS-THE JOB YOU SAVE MAY BE YOURS OR YOUR KIDS.
With the absolutely unbelievable US debt, what choice does the government have other than to print more $$$. We certainly cannot produce ourselves out of this! To be bearish on gold now is to fly in the face of the reality staring us in the face. Super inflation is not a matter of IF but only WHEN.
Gold and silver ETFs with stop limits placed under them are wise and prudent investments even with them trading at very high levels. I have 15% of my portfolio in them.
Also..I am still into equities with these stop limits in place so that if the offal hits the fan, my portfolio just takes a small hit.