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February 03, 2013 at 08:00 AM
The stock market’s rise from its 2009 bottom has been strong and mostly void of long interruptions. Is it a warning sign of trouble ahead?
The CBOE S&P 500 Volatility Index (VIX) is one tool that measures fear and complacency in the markets.
The VIX tends to bottom, as it is right now, when complacency is high and fear is low. Conversely, equity markets are typically overstretched when the VIX is depressed.
Over the last five years the VIX has never closed below the 13 level, and the majority of the time the VIX traded above the 20 level.
This year, however, the VIX has already closed below 13 for the first time since 2007.
The VIX’s cousin, VXN, measures volatility of the Nasdaq 100 (QQQ) and here too, stock volatility is extremely depressed. Now around 14, these volatility levels were last seen at its all-time lows in 2005, and, although that didn’t mark the exact top in the Nasdaq, it was a great level to purchase inexpensive volatility protection.
Another hint about stock market sentiment is the Commodity Futures Trading Commission, which provides a breakdown of the “smart” money and the “dumb” money based on classifications of hedgers or speculators. Over the long run the hedgers are usually on the winning side of the trade and the speculators the losing side.
In the face of the S&P 500’s (VOO) rally, hedgers have gotten more short in their equity positions.
