Friday 27th October 2017
Don’t buy into the complacency….
Complacency is something that tends to presage the end of something….
You sometimes see it in the workplace when an employee or colleague stops trying, stops learning and stops contributing – but continues to turn out for the cheque in the mistaken belief that he has a job for life….
You see it with certain businesses where a wrong-headed attitude says you only need throw open the doors and customers will show up regardless of declining values and deteriorating service….
You see it in partnerships of all sorts where one party stops making the effort, stops observing rules and starts behaving badly – overlooking the fact that to remain in any relationship is a partner’s choice and not a mandatory obligation….
- The rebalancing effect….
Complacency levels tend to peak just ahead of the P45 landing on the desk, the liquidator showing up at the front door or the divorce papers falling through the letterbox….
It’s almost as if the world works to overcome preconceptions that have travelled too far in one direction and need to be rebalanced….
Just when people, businesses and investors feel at their most secure – believing that what is in place now will continue in perpetuity – that’s the exact moment when the wind finally changes direction and blows hard the other way….
In good times, people forget that the wind can change direction at all….
They forget that things can go the other way….
They forget verb tenses. They forget that what is right now is not necessarily forever….
That’s complacency. Complacency in action. And it’s a dangerous thing. Something you need to be constantly aware of….
‘Success breeds complacency. Complacency breeds failure. Only the paranoid [will] survive.’
Those are the words of Andrew Grove, a businessman who pioneered the semi-conductor industry. He’s right….
And stock market investors would do well to heed his words right now. The signs are that a healthy dose of paranoia is in order….
- Up, up and ever upwards….
Stock values have been going up, up, up – all over the world….
It doesn’t matter what chart you look at – everything is sitting at or close to an all-time-high. We looked at how this happened on Tuesday….
On the Dow Jones Industrial Average, the S&P 500, the NASDAQ, the FTSE 100, the FTSE 250, the DAX, the French CAC 40 – stock values are higher than they have ever been….
Even the Japanese stock market has risen from the dead. The NIKKEI 250 is on a roll for the first time in a generation….
The FTSE All-World Index tells the story. Global stocks are at the top of the historic mountain….
Right now, stock buyers are paying more for listed businesses and every pound note or dollar those businesses earn than at any time in history….
And the upward trajectory shows no sign of letting up. The global bull market in stocks is getting on for 10-years-old.
And the signs are that investors remain as calm as cucumbers – expecting this ascension in values to continue…. on and on…. up and ever upward…. straight and true like a rocket fed by a new and potent mixture of fuel that never gives up…. never gives out….
- Complacency is off the charts right now….
Look at the CBOE Volatility Index (VIX)….
Some people refer to VIX as the Fear Index. You might also refer to it as the Complacency Index.
The Index measures how volatile investors expect the market 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 market is just about as complacent as it has been at any time in history….
It has been trending downward ever since the global financial crisis of 2008/09. In other words, investors have become increasingly more complacent the longer the bull market in stocks has continued….
On 5th October that complacency reached an historical high-point. The VIX closed that day at its lowest-ever level – hitting 9.19.
Let me put that figure into perspective….
Between 1990 and 2016 the VIX closed lower than 10.0 just nine times. During 2017, the VIX has already closed lower than 10.0 on 35 separate occasions….
In other words, stock market investors are feeling little if any fear right now….
Any expectation of volatility in the market has all but disappeared….
The market expects things to continue just as they have done for the last decade – heading up with no deviation, hesitation or wobble….
Such high levels of complacency in the market should be considered a danger sign….
- Complacency levels are a contrarian signal….
I am a contrarian in nature and in deed….
When complacency hits an historical high-point and fear is next to non-existent on the scale, I get scared….
When the market expects nothing but calm waters and a smooth voyage ahead, that is the time to batten down the hatches and reach for the life-jacket in anticipation of wind and a rising swell….
When the guest is least expected – be it change, deviation, correction or crash – my contrarian instincts tell me to listen out for a knock at the door….
When the market has its guard down, that is the time to put your guard up.
When the market continues to take big risks in expectation of certain profit, that is the time to stay out and avoid losses.
Complacency rules in October 2017. The markets are on auto-pilot. The VIX Index tells us nothing can go wrong….
So, I tell you now, expect the worst. Feel the fear.
You don’t need to dig a bunker or crack out the Kalashnikov. But, if you’re in the stock market, you might want to think about getting out with your profits intact. Cash and/or gold are good safe-haven options when the market goes wrong. The trick is to act before it goes wrong. When it goes wrong is often too late….
Whatever the market least expects to happen will inevitably come to pass when it least expects it to.
The VIX readings this month tell us we might not be too far away from that point….
That’s how it looks from here….
I’ll be back on Tuesday.
All the best,