We Have Entered The Mania Phase: Market Complacency Has Never Been Higher

Tyler Durden's picture

More than merely a subjective, psychological state, the complacency of market participants can be effectively quantified, which is precisely what Deutsche Bank's David Bianco has done by looking at the ratio of the market's P/E to implied vol or VIX.

As Bianco notes, "our PE/VIX market emotion indicator climbed to 1.3 on S&P trailing PE of 18 and 3m avg VIX of 14. A level between 1.2-1.5 signals complacency. There was similar complacency going into summer last year, with S&P trailing PE at 17.5 and a calm market kept VIX at 10-14. The complacency persisted to July but then faded as the risk of higher yields came on falling unemployment, but yields ultimately stayed subdued preventing any major summer sell-off. Yet a selloff began in late Sept as oil prices started cracking and the dollar climbing."

And while the 3M trailing average may be at "only" at 1.30 suggesting prevailing complacency, the chart below shows that on a daily basis, the PE/VIX ratio just hit 1.49x - it has never been higher, and again based on DB's estimation, market sentiment has now crossed from the complacency zone into outright Mania.

The last time this ratio was at the current level: late 2007/early 2008, just before the Fed had to launch a multi-trillion bailout to save capitalism as we know it.

So is a correction imminent? Depends on one's definition: Deutsche sees the probability of a 5% correction as "high", although the question is whether the S&P will slide by 10% or more in the coming months. One look a the chart below shows that it has been over three calendar years or 916 trading days since the last 10% market drop, the third longest period in history without a 10% drop, so yes: one could say we are indeed overdue.

From DB:

We believe the probability of a 5%+ dip is high this summer and our tactical call remains Down given the S&P now at an even higher PE than a year ago, heightened uncertainty in 10yr yields, weak earnings growth and continued soft economic data. We haven’t had a 5%+ dip this year. Historically 5%+ dips are common and happen at least once a year since 1960, except 1964, 1993 & 1995. It has been 916 trading days (3.6 years) since a 10% correction. Selloff triggers could be a further rise in 10yr yields especially if UE keeps falling amidst slow economic growth and Fed remains unclear on first hike timing, or a jump in the dollar upon the Fed expressing firm intentions to hike in Sept.

Of course, the time since a 10% correction would have been far, far shorter had Bullard not popped up in October when the market had plunged 9.8% in the matter of days, only for the Fed "hawk" to suggest that should the market selloff continue, the Fed can always do QE4.

Which is why even a token 10% market correction here could be catastrophic: since the BTFD and BTFATH "mentality" is now purely driven by faith that the Fed will never let the market drop again, anything suggesting a loss of control by the market could become a self-fulfilling prophecy, and all those who suggest that a 10% drop is just what the market needs, is cathartic and so on, may find that suddenly there is not a single BTFDer left once stocks do drop by 10.1% or more...

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buzzsaw99's picture

mr. yellen has set the price [/randolph duke]

Looney's picture

I can’t wait to see all those bankers jumping off their windows in droves, just like during the Great Depression.

Oh, and all those “shares-buy(BTFATH)back-executives” too.

I even have a name for them – BASE Jumpers (Bankers And Scumbag-Executives) ;-)


SpiOpsChiwowwow's picture

This is what I would like. We know the ZH posts are queued up and released in a semi random fashion, yea?

I like the Frontrunning concept every morning and I would like for Sacrilege to expand on this concept by listing the ZH queue contents at the end of each posting so we can

SpiOpsChiwowwow's picture

Rememeber "OPEN THREAD"?

enloe creek's picture

It is different this time trust me buy moar

SpiOpsChiwowwow's picture

Where is everyone?


OC Sure's picture



"...just before the Fed had to launch a multi-trillion bailout to save capitalism as we know it."


Isn't capitalism as you know it not Capitalism at all? Isn't it Corruption?

How can one attempt to defend a thing if they can't define it? 

...When even ZH succumbs to the nonsense of mainstream mesmerization, there goes cyber-delphia.

oudinot's picture

Capitalism has always been corrupt.

As is Communism.

As is Socialism.

As is Democracy.

As is Royalty.

As is Islam.

As is Zionism.

As is Republicanism.

As is any civilized system man has created.

Suck it up sheeple, the fences of our lives may change their names, their colours, even their smell but they still all remain our chains under any light.

SpiOpsChiwowwow's picture

Remember when ZH was the place to

yogibear's picture

Rightfully so when you have a Fed hell-bent on keeping markets going up by printing ever more money. Banks will just plow the money in stocks.

QE 4 is 99% assured. 

Ever larger bubbles each time with larger stimulus each time.

SpiOpsChiwowwow's picture

Does anyone think that 'Oh Regional Indian' is actually David Duchovny?

I always thought that, I dunno why.

InsanityIsWinning's picture

Diffenence this time, Fed won't and can't let it crash . . . they own it, it's central planning at stake . . . BTFD!

Ajax_USB_Port_Repair_Service_'s picture

How many Trolltoons does it take to buy a Bitcoin?

Doug's picture

This time it IS different.

gdiamond22's picture

They didn't SAVE capitalism, they saved corporatism, cronyism, special interests and interventionists. Capitalism died in 1913.

SpiOpsChiwowwow's picture

Does anyone know how to make a labour day bbq slider? On the grill?

Cloud9.5's picture

I need this puppy to pop.  I have to move some money in the next two months.

Ajax_USB_Port_Repair_Service_'s picture

Pawn Shop prices will be volatile due to the oversupply of incoming goods.

oudinot's picture

Manias do not occur with markets  at these  low volumes  we have now.

The manias were in 2000 and 2007, since then it is all central banks and a vast  winnowing of retail and value investors. A patiche of a true market.

The charade is almost over.

Then comes war; if we are lucky it might only get the Second (and greater) Great Depression.  Unfortunately, both may be on the the reset menu.

Buy gold, rice, low taxed real estate (non western jurisdictions), protection (firearms, ammo for the poor; accountants , off shore lawyers holding ((discretely))  assets for the wealthy) and  hide or sell your prominent toys (fancy cars, boats, jewellry).

Even then, you still might be fucked as ," The times, they are a changing".

Ban KKiller's picture

All I know is Nationstar Mortgage, LLC insiders are selling their stock in their shitty company...


fremannx's picture

The global debt bubble has burst, the mania phase is over. All bubbles burst, most quite violently. This "Anatomy of a Bubble" explains what happens next...