Stock market complacency is back – Business Insider

Stock market complacency is back – Business Insider

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Market complacency has re-emerged, warns Deutsche Bank’s David Bianco.His preferred measure of this is the
PE / VIX ratio. (PE is short for price-earnings, a measure of stock market value. The VIX is the CBOE volatility index, a rough measure of “fear” in the stock market.)

From Bianco’s note: “Our PE/VIX market emotion indicator climbed to 1.3 on S&P trailing PE of 18 and 3m avg VIX of 14. A level between 1.2-1.5 signals complacency. There was similar complacency going into summer last year, with S&P trailing PE at 17.5 and a calm market kept VIX at 10-14. The complacency persisted to July but then faded as the risk of higher yields came on falling unemployment, but yields ultimately stayed subdued preventing any major summer sell-off. Yet a selloff began in late Sept as oil prices started cracking and the dollar climbing.”

Bianco illustrated this in a pair of charts, the bottom one decomposing the PE/VIX to its various components.

As you can see, this measure signaled similar warnings ahead of the dotcom bubble bursting the global financial crisis coming to a head.

Deutsche Bank

Bianco is cautious on stocks right now, and he’s telling clients the next 5% move in the market will probably be down “given the S&P now at an even higher PE than a year ago, heightened uncertainty in 10yr yields, weak earnings growth and continued soft economic data.”

“Historically 5%+ dips are common and happen at least once a year since 1960, except 1964, 1993 & 1995,” he noted. “It has been 916 trading days (3.6 years) since a 10% correction. Selloff triggers could be a further rise in 10yr yields especially if UE keeps falling amidst slow economic growth and Fed remains unclear on first hike timing, or a jump in the dollar upon the Fed expressing firm intentions to hike in Sept.”

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Stock market complacency is back – Business Insider

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