“Great things are not accomplished by those who yield to trends and fads and popular opinion,” once remarked Jack Kerouac. Perhaps Kerouac had the stock market in mind when he made this observation…we don’t know. But if he did, he would’ve likely perceived a stern warning from recent volatility index readings and investor complacency.
The volatility index measures investor expectations of stock market volatility over the next 30 days. Generally, a volatility index reading below 15 has been a good time to sell. For example, in April 2011 the volatility index dropped below 15…presaging a swift 20 percent decline in the S&P 500.
The first quarter of 2012 concluded last week. If you can believe it, the stock market, as represented by the S&P 500, is off to its best start in 14 years. Year-to-date it’s up 12 percent.
But while everyone was yielding to the popular opinion that a new bull market is underway, the volatility index did something it rarely does. Not only did it drop below 15, on March 16th it dropped all the way to 13.66 – the lowest reading in nearly 5 years. What’s more, hardly a soul noticed…which we find quite peculiar considering what happened last time…
After the volatility index fell to 12.75 on June 20, 2007, the S&P 500 continued to rally all the way to 1,565 on October 9 of that year. By then, unfortunately, the stock market had enticed the last of the dumb money back so that it could crush the little guy’s hopes and dreams forever. From October 9, 2007 to March 9, 2009, the S&P 500 crashed all the way to 676…handing buy and hold investors a 57 percent loss.
Yet for the moment no one seems to care…
What Could Possibly Go Wrong?
While the S&P 500 ran up 12 percent during the first quarter, the NASDAQ jumped 18 percent. But that’s nothing…
Year-to-date Apple’s up 70 percent, Bank of America’s up 72 percent, Smith & Wesson’s up 77 percent, Arctic Cat’s up 90 percent, and drug makers Regerneron and Vivus are up 110 percent and 129 percent respectively. With returns like these, how can even the coldest hearts not warm up to the endearing splendor of the bull market?
Plus, what’s not to love about rising stock prices?
They make a man feel wiser, richer, and better looking all at once. Suddenly his bald spot’s no longer getting bigger…it’s getting smaller, along with his waist line. Conversely, his 401k statement’s no longer getting smaller…it’s getting bigger.
Joyfully, upon opening his monthly statement, he’s greeted with the pleasing satisfaction of ballooning wealth. He fancies his shrewd investing abilities to be equal to Warren Buffett – maybe even superior. What could possibly go wrong?
Here at the Economic Prism we don’t pretend to know what way the stock market will go next. Still, we don’t let that stop us from taking a guess every now and again. Occasionally we are right. Sometimes we are wrong. Though, we always make sure to use the most rudimentary of methods.
Here’s what we mean…
The Time Is Nigh to Walk Away from the Table
There are certain things in life we just know a person shouldn’t do if they want to see their next birthday. These are things so obvious, evident, and elementary we know them to be inherently true…we don’t have to test them to find out.
For instance, a person should not give a Hells Angel biker the middle finger. Nor should they play chicken with a semi-truck. But, above all, a person should not blow off the IRS…unless they want the holy wrath of the federal government bearing down on them night and day.
The point is the proven way to make money in the stock market is to buy low and sell high; not buy high and sell low. Certainly, there are times to buy stocks. Likewise, there are times to sell stocks. The time to buy stocks, obviously, is the opposite of the time to sell stocks. So, too, the time to sell stocks is the opposite of the time to buy stocks. Knowing the difference takes real wisdom.
Right now appears to not be one of the times to buy stocks. Rather, it appears to be one of the times to sell stocks. For the S&P 500’s increased 30 percent over the last 6 months and the volatility index recently dropped below 15.
No doubt, the stock market can run up much longer than even the most ardent joy killer can imagine…particularly if a full blown mania sets in. Nonetheless, those with their wits about them may find the time is nigh to walk away from the table.
for Economic Prism