Submitted by Peter Tchir of TF Market Advisors
“Only Thing We Have to Fear Is A Lack of Fear Itself”
After 6 weeks of steady decline in the stock market, what
amazes me is how little fear there really is.
Investors do not seem concerned.
I have lost count of how many people have pointed to the VIX
as an indicator the market is in okay shape.
There may have been a time where there was empirical evidence that the
VIX was a leading indicator. As far as I
can tell, it is now just a coincident indicator and is part of the risk on/risk
off trade. If you look at stocks, oil,
Eur, and VIX in the morning, all you need to do is look at one of those in the
afternoon, and you can probably come pretty close to guessing where the other 3
markets are. That is all the evidence I
need to decide that VIX is no longer a leading indicator. I have heard the smart money now looks at
forward implied volatility or volatility skew as a better predictor of future
market moves. Those sounds confusing
enough to me that they may work, but the VIX, in my opinion has little predictive
value, and if anything may be a good contrary indicator. It seems to me that VIX gets very low before
big corrections, and VIX gets very high before big rallies.
Speaking of contrary indicators, even Alan Abelson took the
time to point out that the American Association of Individual Investors had
turned decidedly bearish, which is a contrary indicator. Again, maybe that has been the case, but for
the past 6 months, investors seemed to time the market pretty well. They turned bullish and the market continued
to trend higher. They became bearish and
the market started to sell off. The
timing has not been perfect, but it doesn’t completely support the assumption
that is a contrary indicator. Once
everyone knows about a contrary indicator, does it remain a contrary
indicator? Maybe it is the fact that
retail is now so irrelevant to the market, that their sentiment doesn’t
matter? Or maybe it is because the
internet has created a greater bias to the survey than it had in the past? In any case, it makes me nervous anyone who
comments on this number is convinced it is a contrary indicator.
I hate to bring my mother into it, but even she is asking if
she should buy at the 200 day moving average or buy a bit early in case it
doesn’t get there. It is getting hard to
type because of that annoying noise made by trucks backing up to load up on
S&P 500 here at the 200 DMA. Maybe
it will work, but it seems like too many people are thinking the same thing for
it to be a good strategy. The people I
listen to on TV seem supremely confident that we have strong support at the 200
DMA and are looking forward to buying stocks there. Again, where is the fear?
I have head the “stocks climb the wall of worry” trotted out
a few times, though less than I expected.
Sadly, the people who like this cliché don’t really seem worried, they
just like to point out reasons people could worry. What worries me is how many analysts get
something completely wrong, then 2 months later change their opinion and ignore
the fact they were ever wrong. In early
May almost no one was calling for haircuts or restructuring any time soon. Now they all say there will be. How many analysts predicted that stimulus
from Japanese rebuilding efforts would be good, and now blame all their overly optimistic
forecasts on supply problems from Japan?
I have no problem with changing your mind over time, but I do worry
about a market that doesn’t worry about how good analysts have been.
Finally, the one comment that struck me as most peculiar was
Mr. Santoli, who I think is very good, trotting out “The market never discounts
the same news twice” quotation.
Seriously, that is why we shouldn’t worry? Is it that sort of thought process that let
the market rebound strongly after Bear Stearns was saved only to be shocked by
Lehman failing? Did we discount Greece
last year so don’t need to again this year?
Or was last year discounting a liquidity event and now it is a solvency
event? Of all the market slogans, this
one irritates me more than any other as it reeks of complacency and has all the
practical applications of a horoscope – you can always interpret the results to
make it seem correct.
But why is there no
I think it all comes down to 3 letter words. Mom, Dad, Fed, IMF, and ECB. Children know that their parents are there
for them, to take care of them, and to make them safe. At the first sound of thunder, a child will
look for their parent and take comfort in their arms. Little children don’t necessarily know why,
they just know that mom and dad will be there for them and will make them feel
better. The market must have that same
faith in the Fed, IMF, and ECB. Whenever
the data gets bad, the market ‘knows’ that one of these entities will be there
for them. Maybe it is QE3 instead of warm
milk, but these entities will be there to support them. I don’t know how long these entities can
support every blip in the stock market.
The real economy is different than the stock market, and all the cures
and comforts of these entities have done a great deal for the stock market in
the short term, but relatively little for the economy, and the long term
consequences of their actions are yet to be felt. I certainly don’t want a 30 year old kid
living in my basement because I made it so easy for him that he was never able
to go out and do it on his own. At some
point the Fed is going to have to kick some birds out of the nest and see if
they can fly on their own. In the meantime,
the market clinging to hopes that its parents can take care of them runs the
risk that the problems are just too big to be dealt with easily and
quickly. Then we might get some real
fear in this market.