Some have been worried about complacency gripping Wall Street. A complacent market—as the theory goes—is vulnerable to being sucker-punched by seen and unforeseen forces, potentially leading to a precipitous plunge.
There is some cause for concern. Wall Street’s so-called fear gauge, the CBOE Volatility Index VIX, -0.79% was trading at 11.80 on Thursday and has been hanging around multiyear lows for weeks (see chart below).
VIX hovers near all-time lows.
Those moves have come as stocks notched a trifecta of record closing highs on Thursday and again on Monday.
Meanwhile, the yield on the benchmark 10-year note TMUBMUSD10Y, +0.00% is trading around 1.54%, after having been pushed to record lows by demand for richer yields as much as by worries about the health of the global economy.
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On Wednesday, stocks pared modest losses to settle marginally higher, supported by minutes from the Federal Open Market Committee’s July meeting, released at 2 p.m. Eastern Time, which appeared to suggest that the central bank was split about raising rates soon.
“Members judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on incoming information,” the minutes said.
Wall Street seemed to focus on a lack of unity within the FOMC, with some members recommending waiting to see healthier levels of inflation and additional data before resuming a retrenchment of accommodative monetary policies that have been in place since the 2008-2009 financial crisis.
An accommodative Fed is one of the reasons, some bearish critics argue, that has helped to push the Dow Jones Industrial Average DJIA, -0.24% and the S&P 500 index SPX, -0.14% Nasdaq Composite Index COMP, -0.03% to fresh highs.
Michael Lebowitz, co-founder at financial blog 720 Global, said implied volatility shows that there is no fear in the market now, and that is particularly concerning in a presidential election year featuring Republican nominee Donald Trump.
“Even if the next 11 weeks leading to the election prove to be uneventful, the VIX at current levels, as shown earlier, has been a prudent place to own protection” said Lebowitz.
However, not everyone believes that the VIX signals impending turmoil. “The VIX is certainly low relative to its 52-week high/low range. However, this is not enough of a reason to believe that complacency is a major issue for the market,” Katie Stockton, chief technical strategist at brokerage firm BTIG, told MarketWatch. Stockton said in 2013, the VIX spent a lot of time near all-time lows, around 12, even as equities ascended into the stratosphere.
MKM Partners Chief Market Technician Jonathan Krinsky agrees. He told MarketWatch that he believes its natural to see the VIX lower as stocks rise. He says the equity market is in a near-term uptrend and cites 2013 as a period in which VIX, at the lows, didn’t result in a sudden shift lower for stocks.
Krinsky points to solid stock-market breadth—meaning an array of stocks are climbing or reaching new highs rather than just a few—and strong sector rotation into sectors considered relatively riskier as signs that this uptrend for stocks has staying power. For example, the S&P 500’s tech sector, a proxy for risk appetite in stocks, is up 11% over the past three months, as of Wednesday, according to FactSet data. By comparison, defensive sectors like telecom and utilities are up 4.9% and 2.8%, respectively.
Bullishness aside, Stockton anticipates that there will be a short-term pullback for the S&P 500 as a better-than-expected, albeit lackluster, earnings season winds down.
August tends to be a period in which investors take vacations and is typically associated with sluggish market activity. That factor and conditions that have seen stocks storm to highs over a relatively short period has her believing that there may room for a near-term hiccup.
But on the upside, Stockton maintains a long-term call for the S&P 500 to hit 2,400 in the next six or 12 months.