Did you ever hide in the closet, or stand behind a door, just to have the fun of spooking your unsuspecting sibling, just to hear the absolute fright in the voice and to see the eye lids widen in panic? In that moment, there is a deep fear of nothing but the idea of something to fear. One is taken to that place quickly, but once it is known that there is nothing to fear, the shrieking stops, the eye lids contract, the heartbeat slows.
On Tuesday, the VIX topped out at 19.20. Four business days earlier, the VIX bottomed at 12.30. Today, just two days after topping, and just six days from the bottom, the VIX is trading around 14.7. In the span of a less than a week, we heard the shrieking and we saw the eye lids widen of those who trade the fear in the market. The combo of Bernanke and Italy jumped out from behind the door and spooked the market. Now that it realizes there is nothing to fear, the market heartbeat is easing back to a more normal rhythm.
That rhythm does not fit the standard of normal as in a time when the global economy is clicking, when US political uncertainty is mostly gone, and Europe is not climbing out of a deep, deep fiscal hole. It does, however, fit the normal of, say, the past four years – run up, drop down, run up, drop down, run up, drop down …
The good news is that in those four years, each run up has been a little higher, leaving the DIJA and the S&P 500 near all-time highs. And in this is the rub. It will take a catalyst of some sort to help the indices break through, but in the meantime, they will run up to the line and pullback from it. Right here, right now, is a trading opportunity, if you don’t get spooked.
The VIX is about measuring volatility, and when the gauge moves as it did this past week, in the territory it moved within, that is a positive trading sign. The market spooked, and it can spook again, but the reality is it has no reason to fall precipitously and then keep falling. For it to do that, it needs a real scare, something along the lines of a 2008 financial crisis or a game of political brinksmanship, such as we saw in the summer of 2011 with the debt ceiling debacle.
So, if the VIX runs up, runs up some more from there, that is fear building. If it goes down and stays down below 20, that is lack of fear. If it stays down for a while (12 or so), the pundits call that complacency, and when it is in that state, just about anything can spook it, just as we saw this past week when the words of a few on the Fed board and the results of the Italian election jumped out from behind the door. I got caught in that spook, as did quite a few others, but so what? That will happen when the market in such as state as it is in now.
One cannot do anything about the crazy sibling hiding in the closet or behind a door, so one has to go about life as if there is nothing to fear. Yet, one should expect from time to time, that crazy sibling will jump out and, for a moment, fear will dominate. Just remember, outside of that moment, life goes on, and for the market now, life going on means a run up, a drop down, a run up, a drop down, a run up …
- The Chicago Purchasing Managers Index (PMI) for February rose to a reading of 56.8, which was above the consensus expectations for a reading of 54.3.
Trade in the day; Invest in your life …
