Too many happy faces

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.

vix long

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.

vix short

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 protected]

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

 

6 Comments

  • Hi Keith

    All your work and table pounding is appreciated by those of us who listen.

    Many investing their “dumb money” will most likely feel the pain, more so for those who are leverage in.

    I look forward to your appearance on BNN, good luck!

    Please keep updating this site, we are reading it!

    Happy Trading

    Daryn

    Reply
    • Thanks Daryn
      And don’t forget–we LOVE dumb money. I mean, somebody has to buy at the top and sell at the bottom to provide good investment opportunities and/or profits –Better them then you, right?

      Reply
  • Keith: Can you help me interpret the technicals of UGA, gasoline?
    RSI is at 65 so still a bit to go before oversold.
    Fukk STO at 91 so that would imply perhaps ready for a turn down. However I look at mid Feb and mid Nov Dec and STO held above 90 for many days. So I conclude so could this STO run keep going sideways for days to come.
    MACD is at 45 and still rising.
    One problem is I see very low volume which implies little support for this ralley.

    My conclusion is that it could still rally, perhaps as long as the overall market rallies, but any overall mrkt correction and this one could fall down. There is resistance at 61.25 which is where it closed Monday.
    Question: Can you see it breaking this resistance and if so then it needs say 3 days above to validate a true breakout?
    Your critique of my assessment is appreciated.

    Reply
    • Yes, its S/T overbought–and at a critical point. I wouldn’t buy unless it hits/breaks $61.50 and stays for a few days –the overall pattern has been somewhat flat for a few years, although since 2012 it looks like a symmetrical triangle was forming. Breakouts are bullish from such a pattern, but better to confirm the breakout by waiting before buying.
      BTW–I’m on BNN today, and that would be a good call-in question, as its got a chart that would be good to illustrate on-air. Call the question in from 6pm-7pm to BNN

      Reply
  • the japanese market (or the carry trade) is breaking down (at 13900). the may 2013 nikkei spike high with a test after 7 months: the failure at the double top was big and the break at the trendline was confirming. now the break of the 40 week is the final nail… while all this scenario may break down and not play as did before (2000+2007), is the nikkei behaving like a market indicator (relative to u.s.),will the u.s. be the next cause of the market storm?

    Reply
    • The Japanese market does appear to be rounding over. Not sure that this equals as substantial an amount of trouble for the US–which has a much better looking chart.

      Reply

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