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Wednesday, December 26, 2012

Calm markets

My perception lately has been that investors seems to be extremely calm despite all the "troubles" in the world.  I thought this was an interesting chart expressing that calmness.


Here is an excerpt from the article with the chart.

Can it be? Leuthold’s monthly Risk Aversion Index, which bakes together various credit and swap spreads, commodity and currency prices, and relative asset returns to offer a broad gauge of skittishness, is at a record low going back to 1980. That span includes the Crash of ’87, the rolling emerging-market contagions of the 1990s, and the multiple human and financial calamities of the past decade.

I guess this means there is absolutely nothing to worry about.  Just go about your business.  There is nothing but clear skies overhead for all markets.  Is that really the case?  Here is a slightly different view of the current situation.


Bespoke defines all or nothing days when 400 of the 500 S&P500 stocks are up or down together.  The 90s sure were calm compared to the 2000s weren't they.  I often hear the pundits on TV when asked about uncertainty say there has always been uncertainty and it is no worse today.  This is clearly not true.  The reason 400 or more stocks move together in the same day is because of the uncertainty in the world.   People are buying and selling in panics when the index is up or down because they don't really know what to do.  Despite what appears to be a calm market this year, we have not returned anywhere near to the calmness of the prior two decades.

There is a difference between knowing what the problems are and knowing how the problems are going to work out.  The market cannot possibly price in an unknown outcome.  I think there is an extreme calm in the markets that everything will work out just fine.  If everybody knows what the problems are and if there is a solution to any of them, why haven't any of the problems been solved?  I suggest there is no easy solution when the problem is too much debt.  The market seems to be screaming at me I am going to crash while everybody is twiddling their thumbs and thinking about how much the market is going to go up next year.  Here is what the Wall Street firms think for  next year.


There is one firm that is expecting a small decline next year.  The others are bullish, and some very bullish. Here is the latest Bespoke poll results.


The percent of people bullish has stayed extremely high and has been noticeably high ever since the market topped in Sept.  I believe there is extreme complacency throughout the investing world.  I think a lot of people are going to be caught off guard and that will make for a lot higher volatility in 2013.  I am always amazed at how the market manages to put people to sleep right before pulling the rug out.  It really is quite interesting to watch.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.