Published February 17, 2017
After two months spent churning around while the Nasdaq index caught up, stocks have powered upward so far this month. With this second leg of the post-election rally kicked off, investors have a substantial fear of missing out (FOMO as the social media set would call it). This self-reinforcing ebullience has pushed volatility to extremely low levels. As Chart 1 below from Charlie Bilello shows, the S&P 500 has set a record for the number of days without even a +/-1% move, a record that now stands at some 44 days, a full 10 days or almost 30% longer than the prior record.
Chart 1 – A record period of market calm
This FOMO behavior leads to investors buying every slight dip in price thus leading price dips to be very shallow and short-lived, and leading market volatility to be extremely low. The problem is that this complacency is the pool in which risk breeds.
Mr. Bilello concludes his blog post by noting the following:
The point of maximum risk is the point when everyone believes there is no risk.
We are certainly closer to that point with every day that passes. Thankfully, us trend-followers who seek to exit the market when the trend changes direction have a ready-made plan for getting out when risk returns.
Stocks continued pressing into new highs this week on enthusiasm over expectations of coming tax reform. Monday brought a +0.5% lift for the broad market. And another +0.4% gain Tuesday with Fed Chair Yellen’s testimony offering little new of concern to investors. Wednesday kept the streak alive adding +0.5% despite a higher than expected reading on inflation. A strong report from Cisco Systems (CSCO) offset some profit-taking to keep indexes flat Thursday. After spending most of Friday in negative territory stocks again attracted buyers to jump back to a flat close on the day.
For the fourth consecutive week, the S&P 500 closed with a gain, up +1.52%. The Nasdaq 100 (QQQ) rose +1.91%. The small-cap Russell 2000 continues to lag in 2017, this week hiking +0.86%.