Between fear and complacency….

Monday, 11th March 2019

Between fear and complacency….

The bull market in stocks turned 10-years-old on Saturday….

It’s not been a case of straight up like a vertical line. Bull markets don’t work that way. And nor do bears….

But looked at across the length and breadth of an entire decade, stocks have been going up, up, up….

…. Fueled by the lowest interest rates ever known to man and plentiful cheap and easy credit for governments, businesses and consumers….

…. And given extra impetus by government/central-bank-backed programmes of quantitative-easing, money-printing or bond-buying (call it what you like)….

To put things into context, the FTSE 100 closed at 4434 at the end of 2008 – down 31.8% on the year before….

By July 2018 – at its all-time-highest-point – the index had not only bounced back but had gained more than 75%….

  • Buttering the bread….

It’s not been entirely plain sailing since….

Markets appeared to be on the turn at the end of 2018 with sharp drop-offs in stock values across the global board….

And why not? A correction appeared overdue. And there was plenty going on in the world to unnerve stock-market investors….

…. A trade war boiling-up between the US and China…. Global economic slow-down…. A Brexit hotchpotch that might have global implications….

…. Central bankers seemingly intent on raising interest rates….

…. A debt-bomb ticking away underneath the entire global economic infrastructure – and ticking louder all the time….

No wonder investors were uneasy. No wonder markets worldwide saw increasing outflows of capital toward the end of 2018. No wonder prices started to fall….

But the politicians and the bankers were swift to react. After all, they know better than most which side of the bread needs to be buttered….

‘Productive’ talks were arranged with the Chinese – allaying fears of impending doom….

Then the Fed made all the right noises. Making it clear that for the foreseeable future it would be reigning back its drive to ‘normalize’ the interest rate….

US politicians and economists have recently been wheeled out to peddle the dubious message that ‘debt doesn’t matter….’

Markets got the message – loud and clear. ‘Don’t worry. We’ve got your back….’

And, as if by magic, the market recovered its composure and started to climb once again….

  • Stocks – retracing their steps….

The FTSE 100 hit a 12-month low on 27th December – falling to 6584.68. Since then it has rallied and closed at 7104.31 on Friday evening – up almost 8%….

In the US, the S&P 500 hit its 12-month low on 24th December when it closed on 2351. It has risen 16.7% since to Friday’s closing figure of 2743….

It’s the same story in Europe. On Friday, the Euro STOXX 50 (an index of 50 of the largest and most liquid stocks in the Euro-zone) was back up at 3283.60 after hitting a 12-month low of 2937.36 on 27th December. That’s an interim gain of 11.79%….

Also, in Asia where the MSCI AC Asia Pacific Index has recovered to 156.10 after hitting a 12-month low of 142.20 on Christmas Day – that’s a gain of 9.77%….

What was it that happened at the back end of last year? Was it a wobble? A blip? An anomaly? A seasonal loss of nerve? A temporary aberration? An aborted correction? Or a sign of things to come?

Your call. But whatever it was – and whatever you want to call it – global stock markets appear to have recovered from it….

Markets are up and down session-on-session but making upward progress across time….

It might not be the strongest or the most convincing progress we have seen during the last decade. But it is progress all the same. And small victories are better than over-whelming defeats….

  • How long might this victory last?

Who knows? It may be permanent. It may be very temporary. Most likely the answer lies – as it almost always does – somewhere in between….

How investors feel will have a lot to do with how it ultimately pans out….

And we can gauge how investors feel – at least US investors (and the effects of what goes down there will inevitably be felt here) – by consulting our old friend, the CBOE Volatility Index or VIX chart. We have referred to it previously….

You might recall that some people call it the Fear Index. You might also think of it as the Complacency Index….

You might also recall that the Index measures how volatile investors expect the US S&P 500 index to be across the next 30-day-period….

If the VIX measurement is high, that can be taken as a sign that investors are fearful. When the VIX measurement is low, that is a signal that the market is complacent….

Right now, the VIX reading of 16.05 is a long way short of the fear levels investors were experiencing back in December when the VIX hit a reading of 36.07….

In fact, the VIX reading right now is just about ‘neutral’ in my book. I keep a close eye on the VIX reading and I have the figures going all the way back to 2004….

Over that entire period the median reading of the VIX has been 15.73. That’s something close to the halfway point between fear and complacency. And that’s where we are right now – give or take a couple of ticks….

The market isn’t particularly fearful. Nor is it particularly complacent. Instead, we appear to be in a period of transition – a calm period before we find out which direction the next big wind is going to blow in from….

  • A period of calm…. 

That assertion is supported by something else I was looking at this week – the 200-day moving average of the S&P 500 index….

The 200-day moving average is a key signal for the S&P 500 and US stocks generally….

Bull markets tend to trade well above the 200-day moving average whilst bear markets tend to trade below it….

And when stocks are trading on or close-to the 200-day moving average, it tends to be a sign that factors driving the market have either changed or are in the process of changing. It tends to denote a period of calm before what happens next comes to pass….

Right now, just like the VIX, the S&P 500’s 200-day moving average indicates a period of transition and calm. The S&P 500 is currently trading very close to its 200-day moving average….

But the key thing for me is that the 200-day moving average is being tested right now to the downside….

In other words, after a period of rallying, the signs are that stocks are turning bearish one again. Stocks could soon be headed down….

The bull market is 10-years-old. He isn’t as strong or as vigorous as he once was. His best days might already be receding in the rear-view mirror.

In his place, a young bear might soon be beating his chest….

Keep an eye on the VIX. If or when the reading goes up, that’s a sign the bear might be getting on top in this wrestling match….

If or when that happens, keep an eye on the Federal Reserve. It will want to protect stock markets at almost any cost….

We might see an interest rate that was going up start to come back down again….

That’s the truth of it as we see it….

All the best,

Dave Gibson

Money Truths