Breakout

Why this ‘boring’ market will keep chugging higher

Jeff Macke
Breakout

Back in the ‘aughts when markets were crazy and people expressed hope for political “Change” without feeling the need to use ironic quotation marks, the volatility of the S&P 500 (^GSPC) usually referred to as the Vix (^VIX) meant something. Pundits called using the Vix as a proxy for fear and would keep a careful eye on it as a tell for which way the market was headed next.

Back then the Vix would generally trade somewhere in the mid-teens with occasional spikes into the 30s or 40s during periods when traders would be looking to protect their portfolios from huge percentage short-term moves. If the Vix got too low talking heads would wring their hands over complacency. Since stocks famously climb walls of worry, a low Vix measure was assumed to foreshadow ominous drops.

Today the Vix sits below 11.50 and stocks are slightly higher despite weak earnings and a widely expected, but still ugly, negative print in first quarter GDP. Rather than interpreting the market action as complacency traders are generally just accepting that the Vix is lower because the market is open for business. The thing is, the Vix never measured “fear.” It measures expected volatility. If 11.5 seems like a low print that’s only because you aren’t putting it in the context of single-digit trailing volatility.

The Vix is low for a reason and that reason is that stocks simply aren’t going down in large enough gaps to justify paying much for insurance.

In the attached clip Peter Kenny of the Clearpool Group (http://www.clearpoolgroup.com/) says the most important thing for investors to do is find the balance between the confidence to stay invested while staying cognizant of risk. If those seem like contradictory ideas, well, they are. Anyone who ever told you investing successfully is easy was selling you something. This is a conversation for grown-ups.

“They should be weak but they’re not,” says Kenny of stocks. Despite the obviously “very, very soft spot” of economic growth in the first quarter employment is growing, productivity is strong and traders are inclined to believe in the notion of a second half recovery. It certainly doesn’t hurt that M&A activity is running as fast as it has in years, including a bidding war for Hillshire Brands (HSH) of all sleepy companies.

You can sell out if you’d like, but shorting boring markets is a recipe for disaster and it doesn’t get more boring than HIllshire, but today’s 16% price jump is exciting indeed. Kenny’s target for the S&P 500 (^GSPC) is 1975 by year-end and he doesn’t think that’s much of a reach.

Feel free to take exception to that idea in the space below but, at least for the time being the stock market is on Kenny’s side.

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