S&P500 Sets Records for Low Volatility

It happened again—without any major news catalyst, the S&P500 managed to rise again, and in the process, it set a new record high…again. This time it rose by 0.86% on light volume, and the VIX index receded back down to just below 10, meaning it reached levels that are associated with super low volatility.

In terms of technical analysis, the overbought and overstretched conditions we highlighted over the last couple of weeks just got worse—the S&P is now even more overbought and overstretched, apparently without any negative consequences…..at least for now. And these conditions are now evident on daily, weekly and even monthly resolutions.

With respect to US macro data, last week’s results were mixed. While the Empire State manufacturing survey, industrial production and existing home sales all beat their respective consensus estimates, housing starts, import prices and leading indicators all came in worse than expected. So once again, the US economy remains stuck in a super low growth mode, a mode that has not been strong enough to materially boost real wages over the last 7+ years.

Finally, the S&P500 is starting to set other records besides new all-time highs. As of today, the S&P is establishing the longest streak without a 3% draw-down….and this record goes back in history all the way to 1928, or about 90 years. Specifically, this represents 242 trading days—-or almost a year’s worth of trading—without any even minor daily loss.

The more interesting thing to note however is that US equity markets are usually not this calm. Normally, 3%+ corrections happen every year. The problem of course, is that some traders and investors, usually the younger ones who’ve come into the markets after the 2009 lows have simply never experienced severe draw-downs, even if only temporarily. This may falsely lead them to conclude that such draw-downs simply don’t happen anymore. Why does this matter? Because these investors and traders will take the temporary calmness to mean that they can take on more market risk (hey why not, if markets don’t fall anymore, right?). And by taking on more risk—on an assumption that longer-term historical analysis proves is wrong—they are setting themselves up for catastrophic losses when the bigger correction ultimately, and inevitably, arrives.

So the question all investors must ask of themselves is this—will you respect history and be prudent?  Or will you throw caution to the wind and plow all your money into risk assets, and better yet, buy even more on margin?

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