Where Is the Fear in the Markets?

The S&P 500 has been on a downward trajectory since mid-May and the index is now probing the lows reached in March. However, sentiment readings are much too sanguine, indicating that further lows are ahead for US equities in the near term.

First of all, while AAII sentiment is bearish, it is not at the bearish extremes seen last March.

Large speculators’ net positioning in the NASDAQ 100 futures and options has been a good contrarian indicator. As the chart below shows, the latest CFTC Commitment of Traders data shows that not only have NASDAQ 100 large speculators not thrown in the towel on this market, they are buying this dip.

 

Large Speculator net position in NASDAQ 100 future & options

vs. S&P 500

Other commentators have also pointed out that the VIX index, known as the “fear indicator”, hasn’t spiked like it has at the March and other intermediate term bottoms:
 

Comments

[fxtrader07:]

valid observations. BUT: The problem with this bear market (and we are in a secular bear market, no doubt) is that the indexes don't reveal the full picture. Certain sectors have sunk so much that there is pretty little room left for the to fall over the next couple of months. (A year from now, that room might open up as the fundamentals deterioprate even further) the only sector really holding up well and keeping the indices much higher as they would otherwise be are energy and commodity-related stocks. However, their fundamentals are too good to allow for a massive decline at this point, except if the oil/commodities markets correct sharply. The latter event though, would strongly lift beaten-down sectors such as retail or airlines, even if only temporary.
Bottom line: the market isn#t expensive enough , all in all, to allow for another massive drop of 10 or 20% imho. it's not cheap enough and the economy looks too vulnerable to allow for a sharp sustained rally above the may-highs, either. As a result, we may take out the march lows in the S&P by 2-3%, inducing another vix-spike and setting up the next bear-trap followed by a sharp summer-rally towards the May-highs or even slightly beyond.

2008 Jun 30 06:27 AM

[drmalaka:]

I have been surprised about how orderly this retreat has been. There really has not been any indication of panic selling.

2008 Jun 30 07:43 PM

[Jim Hawthorne:]

Yet... We're still in denial!

Be very, very careful what you wish for! The VIX and VXO are both clearly showing higher highs and higher lows on the daily and weekly charts.

Relative to Jan. 2007, both these indexes look plenty scary enough to me!

2008 Jun 30 09:05 PM

[cynic69:]

The likelyhood of an oil correction are just about zip.

2008 Jun 30 11:05 PM

[Gross Profits:]

Guess galewhitaker's accuracy on oil is was about zip

2008 Jul 25 11:38 AM