LIG,
During the past 5 years, the VIX has only gone below 19 on 4 occasions and then only briefly (never for longer than a month). On 3 occasions, what followed were significant downtrends in the market. On two occasions, severe downtrends followed. Maybe you're right that "this time will be different". I'm not betting my money on it.
Yes, but the last 5 years does not correspond to "all-time". The period from early 1991 through 1996 saw VIX almost continuously below 20 in an era of sustained market growth. VIX started running steadily above 20 after the abrupt change in the growth rate in 1995, and for the most part the high spikes in VIX resulted from the deep retraces that characterized a market running up much faster than the historical rate. After the bubble broke we still had several rapid declines followed by returns to the overall downtrend with sharp reversals corresponding to the high VIX. Low VIX (relatively speaking) marks the regions where the trend is relatively smooth, quite independent of the direction of the trend. The fact that VIX is typically higher now than it was in the early 90s is a reflection of the high day to day variation in prices that have characterized the bubble and its subsequent collapse. for VIX to stay in the low 20s all that is needed is a sustained trend or gradual changes in direction instead of "V" bottoms and "^" tops. I can't see past the right edge any more than anyone else, but I cannot rule out a possible return to a state like the early 90s where VIX is at sustained low levels as the market trends or rolls.
I'm not sure how you figured that
I could perhaps have been more explicit. If stock prices do not rise, and earnings double then by definition P/E is cut in half. I don't claim to know what "fair" valuation is for the Nasdaq 100, but if the market in general is now 20% overvalued (I think that is what I have seen quoted for the S&P 500) that could change very quickly unless prices go up as fast as earnings. What is more likely is that prices will lead earnings if the economy grows stronger. Who wants to wait for the earnings to be realized and miss the opportunity to buy at what appears to be a discount to future fair value.
Far too much is made, IMHO, of the rapid rate of price increase from the September low. I agree that the rate is not sustainable, and I would not be surprised to see a substantial retrace toward the lows, but as a bounce off the deepest retrace most of us have ever seen, this bounce is not out of line. Look for example at these two charts of EMLX
finance.yahoo.com
This chart shows a stock that has gone up over 300% in 3 months.. very bubble like.
finance.yahoo.com
This chart shows a stock that is trying to recover from a deep sel loff and has managed to squeeze out about a 1/3 retrace from the severe high to low excursion, moving only about 30% of its peak value.
I'm not saying EMLX ever was or will be worth $100 per share, or even $40 per share, only that a 300% rise off a deep low is very different from a 300% rise continually making new highs. All that matters now is whether investors perceive EMLX is worth $40 again after a market collapse.
Your thesis of the extremely low VIX not preceding a severe market correction could only be valid if we enter another bubble, where PEs again reach unsustainable astronomical levels and where stock prices are again divorced from economic and business fundamentals.
That is not my thesis at all. I would not agree that VIX is at extremely low levels by historical standards. I would argue that we have lived through an era of exceptionally high VIX that accompanied the mania and sharp reversals that went along with it. Given the dramatic changes in the market structure, with easy and cheap access for all participants, I doubt we will see a return to sub 20 VIX as a "normal" condition. There is no escaping the correlation between VIX and market movement, but the correlation is really between VIX and the shape of the price curve, not the level of the curve. There is no evidence to suggest that the mid 20s is a region where the market has to see a sharp correction. What can be said with certainty is that if there is a sharp correction (I don't rule out that possibility) there will be another VIX spike to go along with it. If the market ever returns to a rational sustained growth, it will be comfortable with VIX at current levels. I don't know when or if it will ever happen, but I can't rule out it starting this year or even this month.
Dan |
