Fear In The Market Has Evaporated, And That Means Stocks Are Poised For A Selloff

There are plenty of things to be fearful of these days: Europe could go back to explode mode at any second. US political uncertainty. A downturn in US data, etc.

But investors are showing plenty of signs of not caring.

From the latest note from BTIG’s Dan Greenhaus comes an important observation about the VIX, the index which measures how much investors are willing to pay for downside protection via options. It’s sometimes called the fear index because it rises with more fear.

Anyway, lately it’s been stunningly mellow, with the VIX dropping day after day.

Says Greenhaus:

Lastly, we just wanted to pass along an observation that was making the rounds here at BTIG other than today being the lightest volume day of the year. The VIX index has declined on six of the last eight days and stands at less than 14 and is at the lowest level since the summer of 2007. Front month VIX futures though have fallen below 16, something that has happened a few times since early 2008 (see table below chart). Each of the last times this has happened, the S&P 500 has embarked on a losing streak of varying amounts but generally lasting at least one month. This is a good time to remind clients that August and September are not good months historically speaking.

He adds this table:


And here’s a table of the VIX itself. You can see how much fear has collapsed.


Photo: FRED

One possibility is that the complacency has something to do with the world’s central banks, and the promise that they’re ready to leap into action as soon as markets get hairy.

You could make a good argument that they’ve been behind the curve in terms of the general economy, and that both the ECB and the Fed have been very bad at promoting growth. But when it comes to financial markets, they’ve given strong hints that they’re at the ready if things go south.

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