The Fear of Being Bitten Again

“Besides the last eleven months, there have only been five other streaks where the VIX remained elevated above 20 for at least six months.”

                                                                                                                                        Bespoke Investment Group

These elevated levels in the VIX (CBOE Volatility Index–fear indicator) were signs of angst in the market that a segment of the investment community were fearful that something bad was about to happen … the fear of being bitten again. In the table below in only one case of the five occurrences observed was the S&P 500 lower than it was the day the streak ended one year later … the streak ending 6/4/01. That streak was followed 3 months later by the terror attack of 9/11/2001. The other examples provide positive results a year later with a standout performance on the streak coming out of the financial crisis.

                        Bespoke Investment Group

It is understandable how investors freshly thru the trauma of 2008/2009 would continue to be fearful, not trusting in bailouts and low interest rate environment policy prescriptions … just as many investors today have in clear view of the Covid crash last spring and are fearful of a reccurrence. 

Rearview mirror-gazing … understandable, not advisable

Focusing on bad (or good) past recent experience as a basis for decision making (Recency Bias) is not usually a good idea when investing. You know that old disclaimer, “past performance is no guarantee…” In the current situation when confronted with positive new information you look backward, replay the trauma tapes and refuse to seize on the positive new facts and opportunities for fear of being bitten again. In the case of the opportunities missed by the fearful in the past decade it was all about the fear that a repeat of the financial crisis was laying in wait, just around the corner.

Of course, the long-term stint of the VIX above 20 in the face of massive stimulus (at that time), federal support of the banking system, the auto industry and an accommodative Fed was a perfect sign that the “wall of worry” had not been breached. The health of that bull market (soon-to-be secular bull market) was very much intact. By the time the rear view mirror gazers realized the fix was in it was too late (or so they thought) to buy. Overvaluation became the next roadblock to investing. History in the stock market is replete with examples like this.

The current streak for the VIX is now a record

As of February 12, it was ended by the VIX closing at 19.17. The new record was made in the face of almost daily new highs in the popular indices, in the face of trillions of dollars worth of stimulus (with maybe trillions more in the hopper) and a Fed committed to a zero interest rate policy for as far as the eye can see.

But it is “deja vu all over again”; as of Tuesday, February 16, 2016, the VIX bounces right back up to 21.46 (as of this post) with the Dow , S&P and NASDAQ all recording new all-time intraday highs.

I would say this twenty plus VIX streak augurs well for the health and viability of the current secular bull market. Even though we are still warned daily by a legion of pundits and media talking heads that the next big correction or even collapse is imminent.

Yes, there are elements of extreme speculation in the market, but they are very focused/localized on certain sectors and specific names a la GameStop (GME). Yes, we could have a significant correction any time which would be normal (eventually the protection buyers will be correct). However with the current level of skepticism evidenced in the VIX, we can hardly call this “irrational exuberance.”

My take, the “wall of worry” is unbroken and the opportunities away from the hot spots are still abundant. 

The Wall of Worry

What’s your take?