Why The Warnings?
Over the past week, the chatter from market pundits warning us that the stock market is about to get ugly has increased significantly. What I noticed this time is that the warnings have been coming from numerous "chart watchers".
The argument for a decline makes sense at this point. The pattern the US stock market has been trading in for the past few months has been somewhat predictable. If the pattern continues, the markets should pull back at this level.
Watch for a pullback if pattern continues
In fact, the models that the ARTAIS fund is built on have the strategy sitting in slightly over 40% cash at this point - hardly aggressive.Are Investors Too Comfortable?
At this point a pull back would be expected and normal. Not the end of the world scenario that the popular talking heads have been telling viewers.
I came across two great charts from Doug Kass (of TheStreet.com) that show exactly what traders are looking at right now and what the outcome may be:
Fear in the market, as measured by the VIX, is historically low
Low VIX levels tend to lead to market pullbacksWhat's The VIX And Why Should I Care?
Investors like to look at the level of the VIX to gauge the level of volatility in the market. The concept is that the higher the level of the VIX, the higher the level of volatility. Typically, this higher level is an indication that there is fear among investors in the market - which is why the VIX is often referred to as the "fear indicator".
So What Can Investors Do?
The first VIX, introduced by the CBOE in 1993, was a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, it expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors' expectations on future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.
Long term investors may want to just ignore the pull back, as it is expected here. Anything more than the "expected pullback" may lead to immediate action from the Fed, providing a floor to any major stock market declines. Don't forget this is an election year.
More active investors should keep an eye on the level of the VIX. If the VIX starts to rise quickly, a move to cash may be wise. Then watch to see if traders will come back into the market to continue to S&P's trading pattern.
Will The Trend Continue?