I’ve been pounding the table lately about the increased level of investor complacency as the bull market has charged ahead. You can pull up any of my recent blogs, or Investors Digest / Moneyletter articles (available free at www.valuetrend.ca) or review my last BNN appearance to hear me speak about too various signs of “too many happy faces” (as one of my astute clients once said) amongst retail investors. Just to name a few of my past-cited sentiment indicators of concern:
- the % of investors total assets invested in equity funds has been approaching the 70% danger zone,
- the AAI bull/bear survey has been approaching overly bullish levels,
- the level of margin loans on the NYSE is at record highs,
- the high volume rotation out of market leaders (NAZ, BIOTECH, IWM) into bonds, utilities and consumer staples is a sign of smart money becoming defensive.
Take a look at the 20 year chart of the VIX (volatility index). Notice how it’s been hovering near its 20 year support / lows for the better part of a year. That’s because the deviation of returns during the recent leg of the bull market has been a little too “comfortable”. The longer such lack of volatility lasts, the more likely a spike in volatility will return. I might quote David Wilcox’s (blues guitarist) song Bad Apple here in a message to stock investors – “You need to eat a slice of humble pie. And the longer it takes, the worse it’s going to taste!”.
Now take a look at the daily chart of the VIX. Recent drops in the market caused the VIX level to nearly double in a short period of time. However – The recent selloff on the S&P500 has barely moved the needle on the VIX!
Jason Goepfert of www.sentimentrader.com says this is the first time in history (nearly 30 years) that the S&P 500 sold off more than 2% on a day the VIX “fear gauge” rose less than 15% and was under 16. If we check for jumps of less than 20% when the VIX was below 20, then there were 7 occurrences, 6 of which led to further losses in the very short-term, but by a month later 6 of the 7 had showed positive returns.
Perhaps this year will end up looking a little like 2011. That year, the market peaked in mid-April, then fell some 20% by August. As with our recent markets, the 12 months preceding the market selloff that spring were pretty low in volatility (VIX levels). It was a choppy rise back to the top for most of Q2 and Q3 of 2011. Click on the side panel blog, which I wrote in December, for more evidence of a correction in 2014, along with some potential targets for the downside.
BTW – the cash levels of our ValueTrend Equity Platform hit about 27% by early last week. We’ve been following our own advice and selling early this year.
Keith on BNN television MarketCall: Tomorrow, Tuesday April 15th, 6:00pm EST. Phone in with your questions on technical analysis during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for Keith) to email@example.com
Upcoming speaking engagements:
Cambridge, Ontario: Idea Exchange, 1 North Square, Cambridge, ON N1S 2K6. Tuesday April 29, 2014, 7PM
Guelph, Ontario: Guelph Public Library Main Branch, 100 Norfolk Street, Guelph, ON, N1H 4J6. Tuesday May 6, 2014, 7PM
Markham:Markham Public Library- Markham Village Library Branch, 6031 Hwy 7 E, Markham, ON L3P 3A7. Thursday May 15, 2014, 7PM