Lack of Fear a Concern

Last week, I spoke to subscribers about the complacency in this market.  With a VIX hovering near 20 and the economy still a bit wobbly, it concerned me that such a lack of fear was present.  In fact, the VIX, a gauge of implied volatility for the SPX and generally a fear measure (low means lack of fear, higher the opposite).  Remember, the market does not go straight up forever, yet the VIX was curiously down 14 sessions in November.  So, we followed up with a trade on VIX calls, and then the news about Dubai World and their debt problems surfaced just after...good timing?  Most definitely, but the canary was in the coal mine. 

Pay it Forward

 This bull rally from March has easily been fed by the bears.  Make no mistake, there is not ONE bearish trader, analyst, guru that saw a 65% gain coming.  So, as the fear eased, bears pounded the table louder and louder, but were constantly turned away.  Buyers around every turn, and the bears cover their tracks.  It's been rough going, but the favor is really from the bears....thank you very much.  So, perhaps that generosity will be returned into the future.  As time goes by, the less effect the previous bearish action (2008/2009) has on the markets.  And while the markets have no memory, neither does price.  Is 2010 the time bulls pay it  back to the bears?  

Still No Inflation...but

The dichotomous relationship between gold/dollar/bonds continues, but I think for very different reasons.  Gold, at a new all time high, continues to rise in the midst of low inflaton.  Oh sure, some day inflation MAY be an issue, but I'm not buying it just yet.  How come?  Let's tackle the dollar first.  We're at levels seen in summer 2008...not much lower, really.  So, what's the problem?  That was in a very low time of inflation, in fact DEFLATION was the major problem thereafter.  Bonds are strong and have been all year long.  It's usually the bond market that tells the tale of inflation...nascent as far as these traders are concerned.  Inflation erodes the coupons and principle value of bonds and is the enemy.  Yet, yields move lower.  Perhaps the dynamics of gold and the same 'ol story about an inflation hedge is simply old school.

Seasonal Trends...Drift

To be certain, the seasonal trend through the end of the year is generally bullish.  While that theme may play out as it historically does, keep in mind the low volatility and lack of fuel to drive markets to significant highs.  What could change that?  Certainly some good news about xmas shopping and perhaps a lack of interest from Washington (good luck).  Santa Claus has been absent in recent years, but he may come back to end the year with a flurry.  Certainly a strong bond market tells us risk can be on the table.  Just a word of caution:  Don't be too complacent, as days like Friday will come back to bite hard.

This article is written by Bob Lang, to find out more about
the services he runs for BigTrends, please call 1-800-244-8736.

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