As tense as the stock market, the economy, or even the election seem right now, it's hard to argue that fear isn't just a smidge ahead of itself. In fact, that's exactly the case being made by Ryan Detrick, Senior Technical Strategist at Schaeffer's Investment Research, who says the ''extreme worry" out there makes for the "ultimate contrarian play." Simply put, he says too many people are positioned for higher volatility as measured by record open interest in the VIX (^VIX).
"There will be pullbacks and lots of scary headlines, but by no means do we expect a major sell-off," Detrick says in the attached video. "The bottom line is everyone has it wrong because there's just so much fear out there."
A large part of Detrick's conviction is based on history. Not just long-term performance of the Volatility Index itself, but also historical volatility, which he says has ''totally imploded."
"[Historical volatility] is down 80% since the financial crisis [in 2008] and down 50% since last summer."
He says simple year-on-year price comparisons are inaccurate and do not reflect ''off-the-charts" buying and attempts to pick the bottom. "We think the crowd could definitely have it wrong and volatility could slowly continue to trickle lower."
Of course, the awful open on Monday followed by more weakness on Tuesday has seen the VIX snap a five-week losing streak and put it on course for a 20+ percent gain for the week — which would be its biggest rally in a month — if it holds.
But Detrick says those kinds of short-term moves are to be expected, and he is happy taking the other side of the trade, so to speak, as he predicts stocks will continue to bubble higher and the VIX will continue to dribble lower.
"We think it can continue to work lower and into the low teens," he says, not unlike what happened during the last bull, and hopefully what will happen again during the present one.
"We still think the upward trend since '09 is still firmly in place."