Risk acceptance seems to be driving todays markets. I noted on last weeks blog (http://www.valuetrend.ca/?p=1822) that sentiment indicators tracking retail investors and mutual fund managers show these folks are joyfully jumping back into the market. Levels of stock investing by these folks has reached similar levels that proceeded the last two major bear markets.
Another interesting indicator of risk moving back into the markets is the relative outperformance of small capitalized stocks vs. large cap stocks. This weeks chart features the Russell 2000 (IWM), which is the benchmark index for small cap stocks. Note that IWM has outperformed the S&P500 during most of the 4-year bull market, but especially so since Q3 2012 – as indicated by the comparative relative strength study in the first pane under the chart. You will also see that this market recently made all-time highs, while the S&P500 still lies below its all time high levels of around 1570. Small caps, which are usually favoured by investors seeking a higher risk/return investment, are on the move.
Interesting as well is the VIX chart, presented below. Recall that the VIX is a measurement of implied volatility for the S&P500. While higher risk small cap stocks continue to outperform, the VIX has broken through multi-year levels of support. The new ultra-low VIX levels suggest an extreme level of complacency amongst stock investors – they do not expect much in the way of volatility going forward. Times are good, and should stay that way for a while, according to this index. This reminds me of the famous Mad Magazine mascot character “Alfred E Newman”. On each cover of the now-defunct cult classic magazine of the 1970’s, Alfred would be portrayed in an unusual portrait, with the caption “What, me worry?” underneath his image. Today’s low VIX levels suggests that investors are feeling pretty darned confident about the markets these days. It appears that investor are asking themselves “What, me worry (about stock market risk)?”
Well, as a matter of fact, I do worry about this level of complacency by stock investors. To me, it suggests that the 4-year bull market is growing long in the tooth. I continue to target a peak of around 1550 for the S&P500, likely to be reached by March or April of this year. But thats about the extent of my bullishness.
What, me worry? Actually, yes, I do.