There are a million cliches people lean on to explain some aspect of the market that’s otherwise baffling, and the key one this week – the cliche du semaine – is something along the lines of, “You don’t want to short a dull market.”
And indeed this has been a bit of a dull one lately. The S&P 500 grinds to new highs, accompanied by the Dow transports, with the industrials not that far off.
Even the much-maligned Russell has outperformed the S&P on a relative basis for the last four days, so some of the divergence between the small-caps and the big caps has been worked off to bring valuations a bit more in line (even if the Russell’s weakness stands as one big counterpoint to all the kumbaya talk we’ve been having lately).
Recent volumes have been really weak – trading last week was 22 percent less than the average week, per Mike O’Rourke of JonesTrading.
So there’s some concern that a breakout in the stock market – which we’re seeing now – accompanied by lackluster volume somehow means it’s not “real” in a sense. But try telling that to anyone who bought into the market two or three years ago and has watched it do almost nothing but ride higher since. At this pace, corrections become much less frightening and the worrying only increases when things get truly hairy.
Which brings us to another cliche – the one about too much complacency. A look at volatility right now does underscore the way in which the market is in full Hakuna Matata mode, with one-month VIX implied volatility falling to 38.9 percent, the lowest ever, according to Credit Suisse. VIX options, therefore, are near their cheapest levels ever, and the cash VIX is hanging around the 11 range, so it’s not even ready for its Bar Mitzvah.
(And three-month implied volatility of about 12.5 percent is actually a bit rich, given realized volatility has been a bit more than 10 percent in the last three months – traders are betting on a somnambulant market and getting a market that’s the functional equivalent of rotting tree bark.)
The constructive part of all of this is that the market continues to rotate through various sectors. Old technology like Microsoft had a turn leading the way, which followed good gains for utilities, and the financials were stronger on Tuesday.
Dennis Dick of Bright Trading LLC in Las Vegas pointed out some of the cliches that keep him a bit worried – the lack of worry in total and no real catalysts to keep these things moving – but said, once again, that it’s a difficult environment to make the short selling work.
Which, of course, is only an issue if you’re a die-hard short.