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, whatamazes 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 VIXas an indicator the market is in okay shape. There may have been a time where there was empirical evidence that theVIX was a leading indicator. As far as Ican tell, it is now just a coincident indicator and is part of the risk on/riskoff 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 theafternoon, and you can probably come pretty close to guessing where the other 3markets are. That is all the evidence Ineed to decide that VIX is no longer a leading indicator. I have heard the smart money now looks atforward implied volatility or volatility skew as a better predictor of futuremarket moves. Those sounds confusingenough to me that they may work, but the VIX, in my opinion has little predictivevalue, and if anything may be a good contrary indicator. It seems to me that VIX gets very low beforebig corrections, and VIX gets very high before big rallies.
Speaking of contrary indicators, even Alan Abelson took thetime to point out that the American Association of Individual Investors hadturned decidedly bearish, which is a contrary indicator. Again, maybe that has been the case, but forthe past 6 months, investors seemed to time the market pretty well. They turned bullish and the market continuedto trend higher. They became bearish andthe market started to sell off. Thetiming has not been perfect, but it doesn’t completely support the assumptionthat is a contrary indicator. Onceeveryone knows about a contrary indicator, does it remain a contraryindicator? Maybe it is the fact thatretail is now so irrelevant to the market, that their sentiment doesn’tmatter? Or maybe it is because theinternet has created a greater bias to the survey than it had in the past? In any case, it makes me nervous anyone whocomments on this number is convinced it is a contrary indicator.
I hate to bring my mother into it, but even she is asking ifshe should buy at the 200 day moving average or buy a bit early in case itdoesn’t get there. It is getting hard totype because of that annoying noise made by trucks backing up to load up onS&P 500 here at the 200 DMA. Maybeit will work, but it seems like too many people are thinking the same thing forit to be a good strategy. The people Ilisten to on TV seem supremely confident that we have strong support at the 200DMA and are looking forward to buying stocks there. Again, where is the fear?
I have head the “stocks climb the wall of worry” trotted outa few times, though less than I expected. Sadly, the people who like this cliché don’t really seem worried, theyjust like to point out reasons people could worry. What worries me is how many analysts getsomething completely wrong, then 2 months later change their opinion and ignorethe fact they were ever wrong. In earlyMay almost no one was calling for haircuts or restructuring any time soon. Now they all say there will be. How many analysts predicted that stimulusfrom Japanese rebuilding efforts would be good, and now blame all their overly optimisticforecasts on supply problems from Japan? I have no problem with changing your mind over time, but I do worryabout a market that doesn’t worry about how good analysts have been.
Finally, the one comment that struck me as most peculiar wasMr. Santoli, who I think is very good, trotting out “The market never discountsthe same news twice” quotation. Seriously, that is why we shouldn’t worry? Is it that sort of thought process that letthe market rebound strongly after Bear Stearns was saved only to be shocked byLehman failing? Did we discount Greecelast year so don’t need to again this year? Or was last year discounting a liquidity event and now it is a solvencyevent? Of all the market slogans, thisone irritates me more than any other as it reeks of complacency and has all thepractical applications of a horoscope – you can always interpret the results tomake it seem correct.
But why is there nofear?
I think it all comes down to 3 letter words. Mom, Dad, Fed, IMF, and ECB. Children know that their parents are therefor them, to take care of them, and to make them safe. At the first sound of thunder, a child willlook 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 feelbetter. The market must have that samefaith in the Fed, IMF, and ECB. Wheneverthe data gets bad, the market ‘knows’ that one of these entities will be therefor them. Maybe it is QE3 instead of warmmilk, but these entities will be there to support them. I don’t know how long these entities cansupport every blip in the stock market. The real economy is different than the stock market, and all the curesand comforts of these entities have done a great deal for the stock market inthe short term, but relatively little for the economy, and the long termconsequences of their actions are yet to be felt. I certainly don’t want a 30 year old kidliving in my basement because I made it so easy for him that he was never ableto go out and do it on his own. At somepoint the Fed is going to have to kick some birds out of the nest and see ifthey can fly on their own. In the meantime,the market clinging to hopes that its parents can take care of them runs therisk that the problems are just too big to be dealt with easily andquickly. Then we might get some realfear in this market.
View the Original article