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Guest Post: Complacency Risk Is High

Tyler Durden's picture


Submitted by Lance Roberts of StreetTalk Advisors

Complacency Risk Is High

vix-vs-sp500-012312As I was writing this past weekend's newsletter "A Technical Review Of The Markets" it really dawned on me just how complacent investors have become on the economy, the markets and risk in general.  The mainstream media, and most of analysts, are looking at recent improvements in the economic data as a sign that the economy has begun to make a turn for the better.   This view is further supported by the rise of the stock market. 

With a couple of breadcrumbs, a sprinkle of "hope" and a cup of optimism - analysts, economists and investors have whipped up the perfect concoction by extrapolating recent upticks into long term future advances.  However, this is a game that we have seen play out repeatedly before. 

Take a look at the chart of the volatility index versus the S&P 500.  The media and analyst community were convinced early on in 2007, even though we did protest heavily, that the economy would experience a "Goldilocks scenario" and the economy would "muddle through."  As the market declined, and one indication after another showed that the coming crisis would be far worse than people imagined, investors remained complacent until the "Oh $#@!" moment occurred.  Unfortunately, by that time it was far too late.  The same thing occurred in 2009 as the Fed intervened with quantitative easing and then again in 2010 with Q.E. 2.   Each time, as the volatility index retraced back to levels of complacency, the seeds were sown for the next "Oh $#@!" moment.  

sta-composite-bullishsentiment-012312Reminiscent of the "Perfect Storm" where the Captain of the Andrea Gail gets a brief reprieve from danger as the eye of the storm passed by - investors today are currently basking in warmth of rally not realizing that much more danger lies ahead.  Bullish sentiment, as measured by the composite of AAII and Investors Intelligence indexes, is currently at very bullish levels.  While this does not mean that a market correction of some magnitude is imminent - it does mean that most likely further gains are likely to be small and the next correction is likely not too far away. 

David Rosenberg agreed with this veiw point in today's missive:

  • "Most measures of market sentiment are back to where they were last May just when the S&P 500 was peaking.
  • Short interest has dried up to three year lows.
  • The VIX closed the week below 20 for the first time since last July.
  • As Mike Santoli points out in Barron's, volume in leveraged ETF's versus bearish ones has risen to levels that in the past touched off interim market pullbacks.
  • Credit market indicators have lagged well behind the improvement in equity performance.
  • The S&P 500 is three standard deviation points above its 20-day moving average.
  • Again, as Barron's points out, the ratio of the 15-day volume puts on the S&P 100 Index to bullish call volume hit 2-to-1 last week - this happened in the February 2007, February 2011 and April 2011."

As I said in this past weekend's newsletter if you look at the markets, commodities, bonds and the dollar there is really not much that is screaming "BUY ME" at the current time.  The markets are very overbought on a short term basis and further gains are likely to be limited. 

This is not a prediction of the next bear market cycle or the next recession.  Those are coming, either sooner or later, as they are a function of the economic and business cycle.  The current trend of the market is bullish and the majority of our "buy signals" are aligned.  However, the level of complacency that has surrounded this recent rally is getting to dangerous levels and it is only a function of time before the next "Oh $#@!" moment arrives.  

As Mike Santoli pointed out in his piece in Barron's"Each instance foretold an imminent correction of some significance...the notion that equities have gotten slightly ahead of themselves is as valid now as it was a year ago."   Trade accordingly.

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Mon, 01/23/2012 - 15:27 | 2089888 silver500
silver500's picture

Watch the mainstream media (CNBC Today) explain why the economy and the market has begun to make a turn for the better:


Mon, 01/23/2012 - 15:30 | 2089916 jonny47264
jonny47264's picture


With a couple of breadcrumbs, a sprinkle of "hope" and a cup of optimism.

Win Win Win Win Win Win

Mon, 01/23/2012 - 15:49 | 2089985 Comay Mierda
Comay Mierda's picture

oh shit CNBC now saying things are looking up?  time to pile on the short positions

Mon, 01/23/2012 - 16:51 | 2090207 TruthInSunshine
TruthInSunshine's picture

OT, but oh so worth it (especially since it proves us 'cynics' correct - especially about the role of the Wall Street knob-sucking Federal Reserve):



11 stunning revelations from Larry Summers’s secret economics memo to Barack Obama

Mon, 01/23/2012 - 15:33 | 2089927 gringo28
gringo28's picture

who gives a crap what TV people say? bottom line is if you believe SI is going higher, so will stocks. This article is bullsheet in equating short term VIX pullbacks with investor complacency. The VIX is a lagging indicator; just a measurement of reactions to sell-offs. One might also just as easily interpret the first chart as having higher lows and higher highs, interspersed with spikes in the VIX.

Mon, 01/23/2012 - 16:02 | 2090034 WonderDawg
WonderDawg's picture

If I were you, I would go all in long. RoboTard can help you pick some winners.

Mon, 01/23/2012 - 16:27 | 2090127 gringo28
gringo28's picture

thanks for the advice Suze! now, don't bogart that joint Jerry, and move along.

Mon, 01/23/2012 - 16:30 | 2090135 Spastica Rex
Spastica Rex's picture

Bed, Bath, and Beyond: FUCK YEAH!

Mon, 04/16/2012 - 01:50 | 2347896 jaffa
jaffa's picture

Living systems are a complex dance of forces which find a stability far from balance. Any attainment of balance is quickly met by rising pain which ends the momentary experience of satisfaction or contentment achieved. Buddha's task was to find the solution to this never ending descent into dissatisfaction or Dukkha. The Buddhist faith is based on the belief that he succeeded. Thanks.
air charter plane

Thu, 04/19/2012 - 05:08 | 2357513 jaffa
jaffa's picture

Risk is ubiquitous in all areas of life and risk management is something that we all must do, whether we are managing a major organization or simply crossing the road. When describing risk however, it is convenient to consider that risk practitioners operate in some specific practice areas.Thanks.
network penetration testing

Mon, 01/23/2012 - 15:26 | 2089894 Turd Ferguson
Turd Ferguson's picture

apathy, bitchez!

(I couldn't help myself)

Mon, 01/23/2012 - 15:28 | 2089908 DoChenRollingBearing
DoChenRollingBearing's picture

+ $55,000

Good time to show up here TF!  Gold, baby, gold.

Mon, 01/23/2012 - 15:30 | 2089915 GeneMarchbanks
GeneMarchbanks's picture

True. Election year, all options are on the table as today's EU oil decision shows.

Mon, 01/23/2012 - 15:27 | 2089904 DoChenRollingBearing
DoChenRollingBearing's picture

Review of last weekend's Barron's at my blog.  Curious?  Gmail me at my name, promise to behave and I'll send you the link.  I write about gold & stocks and stuff.

Mon, 01/23/2012 - 17:26 | 2090322 boouood
boouood's picture

Nice blog


Mon, 01/23/2012 - 15:47 | 2089907 TruthInSunshine
TruthInSunshine's picture

"No one" being granted the privilege of being invited on cnBSc (to speak to their 2,063 viewers) will have been able to have seen the next wipeout coming, in its retrospective wake.

"No one."

Go Barton 'Smally' Biggs, or go home....Playa.


*The Abby Joseph Cohen came out of her deeply burrowed mud pit today and saw her shadow, which means there will be at least 6 more weeks of spooz-a-licious upside, propelled by the hand of The Bernank [10 year tbill to 0.00000002% and spooz to 1550 in 6 weeks].

Mon, 01/23/2012 - 15:36 | 2089910 slaughterer
slaughterer's picture

There is literally no support on the ES until 1173-1200.   This market is a disaster waiting to happen.

Mon, 01/23/2012 - 15:30 | 2089912 battle axe
battle axe's picture

The hammer is coming down soon, time to get into cash...

Mon, 01/23/2012 - 15:32 | 2089923 AC_Doctor
AC_Doctor's picture

But RoboRoach says the S&P is going to 1500 within weeks and muni's and Govt. shit bonds will be setting records!

Mon, 01/23/2012 - 15:34 | 2089928 HD
HD's picture

CNBC just rolled out the "stocks are cheap" headline. The bulls are getting desperate.

Mon, 01/23/2012 - 15:43 | 2089964 vote_libertaria...
vote_libertarian_party's picture

"stocks are cheap"???

On CNBC I believe that is the premise of every segment they have since they have existed.  The only debate they have is "Are stocks going up 20% or 30% in the next 6 months".



Mon, 01/23/2012 - 15:50 | 2089988 HD
HD's picture

Yup, Joe Kernan loves that 30% number.

Mon, 01/23/2012 - 15:59 | 2090021 TruthInSunshine
TruthInSunshine's picture

There's a lot of cash (and even far more debt) on the sideline, bitchez.

Mon, 01/23/2012 - 15:36 | 2089935 evolutionx
evolutionx's picture

With most of the world’s major economies as well as the financial system bankrupt, there is only one solution that can save the world economy. Like in the Greek tragedies, Deus ex Machina is now the only way that the world can avoid a total economic collapse. This would involve God being lowered down onto the world stage and miraculously saving the plot.




Mon, 01/23/2012 - 15:38 | 2089942 HD
HD's picture

Good luck with that. God is short the market and long gold.

Mon, 01/23/2012 - 15:40 | 2089947 _ConanTheLibert...
_ConanTheLibertarian_'s picture

The BDI is still dropping fast. This is not normal. Something's coming and it won't be pretty.

Mon, 01/23/2012 - 15:46 | 2089969 GeneMarchbanks
GeneMarchbanks's picture

'This is not normal.'

Check the 3Y or 5Y, many waterfall declines just never from this low of a level...

Um, a trade war maybe? Or just a plain old fashioned one?

Seriously if the tempo of escalation is somewhat surprising but if this hasn't been on your radar for some time, then you need to start paying attention.

Mon, 01/23/2012 - 17:29 | 2090329 walküre
walküre's picture

Um, let's just agree that it looks pretty fucking ugly. BDIY well below 1000 and still dropping. There is simply no demand for anything. Just go into any shop, anywhere. Count containers and ships at the biggest ports. See how many trains are going loaded with containers.

US fuel consumption at 1997 levels. It all makes sense if you're willing to admit that this economy is garbage. There are no jobs and there is no growth coming from anywhere. Sucks to be stuck in this realm.

Mon, 01/23/2012 - 16:00 | 2090028 sabra1
sabra1's picture

janet napolitano in a thong?

Mon, 01/23/2012 - 16:03 | 2090037 HD
HD's picture

That's not funny man - I'm eating lunch over here.

Mon, 01/23/2012 - 16:39 | 2090171 css1971
css1971's picture

New ships.


Mon, 01/23/2012 - 16:59 | 2090240 _ConanTheLibert...
_ConanTheLibertarian_'s picture

No. Fact: many new ships were cancelled or mothballed

Mon, 01/23/2012 - 17:31 | 2090331 walküre
walküre's picture

Correct. Some investment funds promising decent returns on shipping contracts and ship leases are sweating guaranteed.

Mon, 01/23/2012 - 17:22 | 2090308 walküre
walküre's picture

The real economy is going into the crapper. Political leaders around the world are aware. They cannot miss this. Sharp drops in mining stocks as well across the board. This translates into a lack of future demand. No more Chinese or Spanish ghost cities or suburbs with 10% occupancy.

At this rate the market that we're presented on TeeVee will have absolutely nothing to do with the real market which is on its way to a massive global contraction.

For Fuck's sake, we have a number of very large European economies entering harsh recession with massive austerity programs. We have a sudden slow down in Chinese aggregate demand and India's currency and purchasing power are falling off a cliff. Top it all off with the US going to breach their ficticious debt ceiling for the inth time and a world that is moving to trade outside of reserve currency mandates.

This is no longer isolated or unique to any one country or continent. This is global economic collapse of unimaginable proportions. Who cares how the S&P or DJI are closing today, tomorrow or next month? It's a propaganda piece as far as I'm concerned.

There are 7 billion people on this planet that need to eat and drink. There are massive amounts of wealth in very few hands and a mirage of a worldwide peace.

It will be a dog eat dog world and each one for themselves. Doesn't take rocket science to figure this one out.

Mon, 01/23/2012 - 18:17 | 2090518 luna_man
luna_man's picture



Just, Stop It!...You're Scaring me!

What about the "American Dream"?

Mon, 01/23/2012 - 18:38 | 2090577 walküre
walküre's picture

Nah, you can handle it or you wouldn't be here. So? What about that "Dream"? One man's dream is another man's nightmare.

Mon, 01/23/2012 - 15:40 | 2089948 Auburn
Auburn's picture

Haaaaa - Greece is aiming to present a final, final, final deal to its creditors by 13 February - seven days after the government's original target date.  Guess it really will never end (on and on and on we go)

Mon, 01/23/2012 - 15:41 | 2089952 francis_sawyer
francis_sawyer's picture

This is not a prediction of the next bear market cycle or the next recession. Those are coming, either sooner or later, as they are a function of the economic and business cycle

it used to be that "the business cycle" = the credit expansion cycle

Now..."the business cycle" = the money printing cycle

Mon, 01/23/2012 - 17:13 | 2090276 Iam Rich
Iam Rich's picture

No...the credit expansion cycle = fractional reserve lending = money printing =  business cycle.

Mon, 01/23/2012 - 15:44 | 2089971 monopoly
monopoly's picture

"slightly ahead of themselves". Yeah right, how about 3 years early. Remember, tops are a process, way too easy to peak and then move dramatically lower. Get the bulls in, let the bears set up with great charts, then whipsaw the crap out of both. When Mr. Market is done with them, when he spits them out and stamps them out, both bulls and bears.... then he will dump. Hate to say it but holding confetti feels good, if only for a while.

Remember Mr. Market always wins.

Mon, 01/23/2012 - 15:46 | 2089979 Dr. Engali
Dr. Engali's picture

While nothing looks attractive,other than gold, I can't help but think the Bernank is going to keep his foot on the accelerator until after the election. As ugly as the negative yeild on bonds are any dip in equities will send yeilds lower. It is interestig to note that the ten and the thirty have been selling off a bit.

Mon, 01/23/2012 - 16:06 | 2090045 roy10
roy10's picture

Bernanke can't justify printing when the economy is doing better than expected. QE3 is not happening in these market conditions. There really no need - Draghi is doing enough.

Mon, 01/23/2012 - 16:13 | 2090082 Dr. Engali
Dr. Engali's picture

The Bernank is doing the Bawny Fwank. He's doing it through the back door.

Mon, 01/23/2012 - 17:07 | 2090258 SheepDog-One
SheepDog-One's picture

But the economy is 'doing better than expected' due to Bernank's own actions of flooding the world with tsunamis of fake dollars. They did it themselves. 

If Bernanks Maniacal Monetizer team wanted QE this year, they screwed up....should have just let markets drop back to DOW 9,000 level and it would have been a piece of cake. Far as Im concerned their own arrogance ran their ship aground.

Makes me laugh to see fund managers and Wall Streeters begging and pleading for QE when stocks simply cant drop, and are almost back to all-time highs.

Tue, 01/24/2012 - 02:04 | 2091532 StychoKiller
StychoKiller's picture

Ya gotta hate it when a plan blowz up in yer face! :>D

Those wascawwy wobotz!

Mon, 01/23/2012 - 15:58 | 2090004 Cult_of_Reason
Cult_of_Reason's picture

Another perfect contrarian indicator, Barton Biggs today (Bloomberg TV) said he is 65% long and "terrified" of missing a rally and not being levered up long.


Biggs Cites "Strong Rally" Potential for Stocks

“I’m terrified I’m not long enough if we’re going to have a strong rally here, which we could,” he said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu today. Biggs said his net-long position in equities is 65 percent


Mon, 01/23/2012 - 16:07 | 2090049 NotApplicable
NotApplicable's picture

"As I was writing this past weekend's newsletter "A Technical Review Of The Markets" it really dawned on me just how complacent investors have become on the economy, the markets and risk in general."

No more complacent than assuming there are "investors" in the "market."

Mon, 01/23/2012 - 16:13 | 2090079 RichardP
RichardP's picture

Target for DJI is roughly 14,000 by election day.

Mon, 01/23/2012 - 17:35 | 2090347 walküre
walküre's picture

Maybe, maybe not. Why would I invest based on your hunch? Why would I throw good money into this market when I know the Fed or one of their affiliates pulled the plug on the market in 2008? Clearly they pulled the plug then to extort money from government. Market didn't even have to plunge at that rate but the banks were under water and someone wanted to make a statement.

None of this makes any good sense and I'm buying tangible assets all day and night long with the money that I'm earning. What else?

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