Skip to main content

Sound Advice: May 11, 2022

Taking the Pulse of the Market 

Although investors are regularly bombarded by claims that movements of individual stocks as well as those of the market overall are predictable, those pitches are on a par with the Wizard of Oz and the Tooth Fairy.  It is reasonable to believe that over extended periods of time changes in the prices of individual stocks and the investment market as a whole reflect changes in underlying profitability.  It is, however, not reasonable to think that forecasts of what will take place in relatively short periods of time have any merit.

With that said, however, there are some indicators that may be helpful in pointing toward what lies ahead.  Two of the more useful ones are the Goldman Sachs U.S. Equity Sentiment Indicator and the CBOE Volatility Index, a.k.a., the VIX or Fear Index.

The last 14 times the Goldman Sachs indicator hit the extreme low levels that we’re seeing now, returns from stocks in the time that followed were positive 100% of the time, with a median return of 19%.

The VIX is a contrarian indicator that’s also worth watching.  It’s a technical measure that tracks supply and demand for index options.  It measures the changes in how more sophisticated investors are viewing market valuations.

During periods when markets are relatively calm, that indicator generally moves within a range of 10 and 20 on a scale of 0 to 100.  Toward the bottom end, it suggests that investors are quite comfortable with their perception of the market’s future path.  As it moves higher, concern creeps in.  When the VIX climbs above 30, the pace of market turmoil tends to increase as investors become unsettled. 

Readings tend to rise to 30, 40, and higher during high stress periods.  The most recent example of this was on March 16, 2020, the beginning of the pandemic, when the index soared to 65.54.  It went even higher, to 79.13, on October 20, 2008, during the financial crisis of 2008-9.  In both cases, as is typical when the VIX climbs sharply, stocks were much higher a year later.

That indicator has bounced above 30 several times this year, as investors digest the economic and geopolitical problems that have arisen.  Although this high level may persist for a while, as pressure eases, the prices of stocks will recover.

N. Russell Wayne, CFP®

Any questions?  Please contact me at nrwayne@soundasset.com

 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...
Post a Comment
Read more