For almost a month now, the market has gone literally nowhere. Despite news of the passing of the American Health Care Act, the Continuing Resolution, or “stellar” earnings reports, nothing seems able to excite either the bulls or the bears.
The only thing more boring than the market over the past few weeks has been the volatility index which recently hit lows not seen in over a decade...
As was noted last week by John Mauldin:
“There have been only 11 days out of some 6900, going back almost 28 years, when we’ve had a sub-10 VIX. When I look carefully at those dates, the word complacency leaps to mind.”
He is right. And the problem with complacency, like everything else in the world, is that it comes and goes in cycles. The chart below is the MONTHLY read on the volatility index as compared to the S&P 500 index. I have marked the previous low levels of the volatility index and the subsequent corrections...
It should be noted the correction in 1994, while small was following the recession of 1991 as the market was just beginning to enter into the “dot.com” craze. The current environment more closely resembles that of 2007 as the market heads toward the END of a bullish phase with valuations extended, exuberance high and fear extremely low. (I have marked a similar correction back to the 2011 support levels.).
Like high levels of margin debt, low levels of volatility is not a problem, until it is. Falling levels of volatility, like rising levels of margin debt, are not good leading indicators to predict a change in market behavior. However, margin debt, corporate leverage, volatility, when eventually ignited by some catalyst, is the equivalent of throwing a stick of dynamite into a tanker of gasoline.
But that is a story for another day.
For now, the market remains boring as investors rush to “buy in” to the bull market exuberance.
It seems as if investors will never learn.
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