There is no mistaking the trend of market volatility this year has been down. We ended 2012 with quite a few unanswered questions and what does the market hate? Uncertainty!
Yet, it appears much of the anxiety and fear caused by fiscal policy, taxes, unknown monetary policy and global growth issues was swept away —with some very calculated (and bold) rhetoric. In truth, much of the verbiage and language of many central bankers has been great lip service, kicking the can down the road (in most cases that is what we have been hearing from the Euros).
MARKET PSYCHOLOGY
Market volatility is directly correlated to the psychology of the market. In fact, the fear/greed spectrum can be analyzed perfectly using various tools like the VIX, put/call ratio, Rydex ratio, investment surveys like weather vane, AAII and sentiment indicators. Currently, the market is feeling ‘fine,’ a VIX under 13%, but we know this condition cannot exist forever.
In fact, little spikes in volatility give the bulls knots in their stomach. Certainly there are moments in time, call them ‘goldilocks’ moments when equity markets are the ‘only game in town,’ bonds also will have their day in the sun.
COMPLACENCY IS RED FLAG
When there is too much complacency then we become vulnerable—and it only takes a few down days to shake market confidence. Are we there yet? I’m not so sure, but certainly the confidence is high —and for this time of year (traditionally a down period) that is something to be of concern.
Price action rules however, and until the trend changes then we follow the market’s lead.
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Bob Lang has a newly re-launched website at www.explosiveoptions.net, where he manages subscribers, writes a newsletter, hosts webinars and has just opened a brand new chat room.
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