Hardly a Soul Noticed
Jack Kerouac once wisely noted, “Great things are not accomplished by those who yield to trends and fads and popular opinion.” It’s tempting to think he might have had the stock market in mind. Recent fluctuations in market volatility and a troubling sense of investor complacency could certainly align with his insight.
The volatility index serves as a barometer for investor expectations regarding stock market fluctuations over the coming month. Historical data suggests that a volatility index reading below 15 often signals a good time to sell. For instance, when the index sank below 15 in April 2011, it foreshadowed a rapid 20 percent downturn in the S&P 500.
As we wrap up the first quarter of 2012, it’s astonishing to report that the stock market, tracked by the S&P 500, is experiencing its most robust commencement in 14 years, boasting a year-to-date increase of 12 percent.
Yet, while many investors eagerly embrace the belief that a new bull market is emerging, the volatility index behaved anomalously. Not only did it dip below 15, but on March 16th, it plummeted to 13.66, marking the lowest reading in nearly five years. Curiously, very few seemed to take notice of this drop, despite its historical implications.
Recalling the events of June 20, 2007, when the volatility index reached 12.75, the S&P 500 continued to soar to 1,565 by October 9 of that same year. Sadly, this rally was a prelude to a devastating downturn that saw the index crash to 676 by March 9, 2009—inflicting a staggering 57 percent loss on buy-and-hold investors.
Yet, for now, the prevailing sentiment appears to be indifference…
What Could Possibly Go Wrong?
During the first quarter, the S&P 500 surged 12 percent, while the NASDAQ soared by an impressive 18 percent. But even these numbers hardly capture the full picture.
In fact, individual stocks have rallied dramatically: Apple is up 70 percent, Bank of America has risen 72 percent, Smith & Wesson has soared 77 percent, Arctic Cat has gained 90 percent, and pharmaceutical companies Regeneron and Vivus are up 110 percent and 129 percent, respectively. With such enticing returns, it’s challenging not to be swept up in the allure of this bull market.
Moreover, rising stock prices have a way of boosting one’s confidence, making individuals feel wiser, wealthier, and even more attractive. Suddenly, the signs of aging wane as personal finances flourish. Every month, one eagerly anticipates their investment statements, only to find a satisfying increase in wealth, even feeling that their investing prowess rivals that of Warren Buffett—if not surpasses it. What could possibly go wrong?
At the Economic Prism, we don’t claim to predict the stock market’s next move. However, we frequently engage in speculation. Sometimes we are correct; other times, not so much. We strive to employ the simplest methods in our analyses.
The Time Is Nigh to Walk Away from the Table
There are certain fundamental truths in life that we all recognize as self-evident. For instance, provoking a Hells Angel biker or engaging in a game of chicken with a semi-truck are undeniably foolish choices. Perhaps most crucially, ignoring the IRS can invite serious consequences.
The lesson here is clear: the key to stock market success lies in the age-old wisdom of buying low and selling high—not the reverse. There are indeed opportune moments to acquire stocks, as well as times to divest. Knowing when to do so is the hallmark of true financial wisdom.
At this moment, the indicators suggest that now is not the time to buy stocks; rather, it appears to be a prime moment for selling. The S&P 500 has surged 30 percent in the past six months, while the volatility index has dipped below 15.
While the market can continue its ascent longer than even the most skeptical might anticipate—especially if mania takes hold—those who remain clear-headed may find that it’s time to step away from the table.
Sincerely,
MN Gordon
for Economic Prism
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