S&P 500 vs. Volatility Index: Complacency or Capitulation?
A few people have asked why I am not more enthusiastic about any bounce off of these technical levels. The simple answer is that we are still working our way through economic, credit, fundamental earnings, and and valuation issues.
The bounce is from a technical perspective, and recognizes that nothing goes in any one direction for ever.
Consider the market from a psychological perspective: There is certainly concern and fear out there -- down 500 points on record volume cannot easily be waved off. But there are lots of other measures that simply haven't pinned the needle.
I need to see these measures go to eleven, to make me really bullish.
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S&P 500 vs. Volatility Index: Complacency or Capitulation?
click for ginormous chart
chart courtesy of Michael Panzner, Financial Armageddon
Tuesday, September 16, 2008 | 12:15 PM | Permalink
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By my calculations, the market (S&P 500) hasn't been cheaper in any of the last 16 years on a valuation basis. I calculate Price/7-Yr. Moving Avg. Earnings. We're pretty close to 15 right now, which even Ben Graham considers a reasonable buying opportunity.
Posted by: Adam | Sep 16, 2008 12:27:06 PM
600 Million shares traded on the QQQQs yesterday sure seemed like capitulation to me. Today's gap down, seemed to prove me wrong, but we did not break the 41.05 low from earlier this year. Maybe today's bounce is just another opportunity to get short???
Posted by: Joe | Sep 16, 2008 12:27:33 PM
Yes, I think that the VIX goes somewhat higher over the next several trading sessions.
Also, the XLF is well above it’s July 15 low (of $17); a retest of the level would provide a more convincing bottom.
Posted by: DL | Sep 16, 2008 12:33:59 PM
Seriously-this lack of real fear and constant gov't announcements is killing me...not even gonna mention the 7 day work week thing>>>Enjoy the afternoon - should be wild.
Posted by: TRW | Sep 16, 2008 12:35:13 PM
>I calculate Price/7-Yr. Moving Avg. Earnings.
Yeah but it is not easy to trust earnings to hold, heck to trust them not to simply crater, anywhere but in the oil industry? Maybe food? But think about the 7yr avg of, say, the hotel business compared to its overbuilt future. Ugh.
I'm baffled at what actual investors (as compared to you short-term speculator types) think they should buy. In a recession the ideal thing is to pick up hard assets, ideally for pennies on the dollar, but where are the cheap, hard, assets?
Unless you are savvy enough to take a walk thru the wreckage of the Shanghei, I guess. There must be some shiny new factories buried under that rubble. Way beyond me, though.
Guess I'm just too chicken to get rich.
Posted by: a different chris | Sep 16, 2008 12:43:57 PM
The S&P is only down ~24% from its all-time highs and markets have on average declined 29% from peak to trough during a recession. This is looking like a nasty recession, so why can't the market have an above average correction? From what I've seen, P/Es are based on historic-above the mean profit margins. Margins revert to the mean and H2 & 2009 profit estimates remain too high. Talk to me when P/Es get to 12 or less.
Posted by: Lloyd | Sep 16, 2008 12:46:19 PM
I just don't see much of even a short term rally. I mean we're only 6% below the 50-day MA and 150 pts below the 200-day. Even "the next leg down" should take us at least another 6% lower. Based on everything that's going on I would expect a bounce somewhere around the 2/3 retracement level.
The actual panic felt is just not coming up in any of the numbers. I'll stick my head out and say we fall another 10% before a huge rally into year end and then eventually make an even lower low as profits disappear from real (i.e. not gas/financials) companies.
Posted by: mikkel | Sep 16, 2008 12:49:07 PM
SPY 85 here we come! seriously, that is one of the prettiest, most instructive charts a guy in cash could ever see. thank you, BR. there may be rallies here and there but folks interested in holding on to their hard-earned savings should take seriously that right shoulder. Atlas shrugged. indeed.
Posted by: scorpio | Sep 16, 2008 12:49:52 PM
Barry, much has been made of the current environment being the worst since the '30s. As derivatives vet I can tell you that during the '87 crash, 90s Nikkei collapse and 9/11 the equivalent of the VIX reached 60. I'd be very surprised if, when we look back on this, we see 39 was the peak.
Posted by: Chris Pearce | Sep 16, 2008 12:53:27 PM
I'm sitting here reading an article in "The Economist," about our corporate profit out-look and it don't look good. Of course we have already talked about here on TBP.
No cut, no bail-out! Quit crying Wall-Street. The FED, Treasury have to keep there powder dry. Whoo! is it going to get bad!!!
Posted by: Concerned Citizen | Sep 16, 2008 12:54:53 PM
It's interesting to note that some assume they can "recognize" emotions in near-real time and that they will manifest in the same manner as another occurrance.
There is equal risk in assuming "things are the same this time" as there is assuming "things are different this time."
One cannot identify emotion until it has already occurred and even then, we can not be sure that we have accurately identified it until more time has passed...
"Until a man has expressed his emotion, he does not yet know what emotion it is..." ~ R.G. Collingwood
Posted by: The Financial Philosopher | Sep 16, 2008 1:19:06 PM
...As derivatives vet I can tell you that during the '87 crash, 90s Nikkei collapse and 9/11 the equivalent of the VIX reached 60. I'd be very surprised if, when we look back on this, we see 39 was the peak.
Posted by: Chris Pearce | Sep 16, 2008 12:53:27 PM
to add, if the 401(klown) universe rolls out of their Mutfunds, we'll see non-linearity that makes volitility look Placid.
Yeah but it is not easy to trust earnings to hold, heck to trust them not to simply crater, anywhere but in the oil industry? Maybe food? But think about the 7yr avg of, say, the hotel business compared to its overbuilt future. Ugh.
I'm baffled at what actual investors (as compared to you short-term speculator types) think they should buy. In a recession the ideal thing is to pick up hard assets, ideally for pennies on the dollar, but where are the cheap, hard, assets?
Posted by: a different chris | Sep 16, 2008 12:43:57 PM
with that, seriously ~25X for PNRA??
can we remember why Stocks used to pay Cash Dividends? Bounced cheques are a pretty good check on the green eyeshade types...
these share prices that quote out to .xx(xxx)
should alert anyone paying attention that there's more than 'capital formation' going on..
Posted by: Mark E Hoffer | Sep 16, 2008 1:20:22 PM
because i expect a bounce today, i bot the uxi (i do not recommend following in my footsteps, however! it's a thinly traded ultra long on the $indu.) it was one of those buy-now-ask-questions-later trades that has a 50-50 chance of panning out in this crap shoot.
better plays would have been the qld or sso, i suspect
Posted by: karen | Sep 16, 2008 1:21:47 PM
Short term bottom is in. I'm long on some call options.
The fact that BR broke a site record has been a consistent indicator.
Posted by: John Borchers | Sep 16, 2008 1:23:04 PM
earnings will continue to decline and a Hi Pe requires real growth.
We know 15% of spx earnings will be almost nada from the financials.
Energy will be down this qtr. Retail prob down. Apple will sell fewer ipods and i phones and Rimm and Apple will be competitive on pricing.
so if earnings do fall as some suggest (some do not) we will likely see a real contraction in PEs unless the bigger fool comes to the rescue.
the combo of lower earnings and lower PEs will be deadly to market valuation.
Posted by: HAl | Sep 16, 2008 1:31:19 PM
I don't think we are anywhere near exhausted from a technical perspective. The bounce in July and the sideways movement since has given the downside possibilities a lot of room. We have barely broken the July lows. I could see 50 to 100 points more easily before a significant technical bounce.
Anyone buying here because they think this is over is guilty of wishful thinking.
Posted by: Curtis Faith | Sep 16, 2008 1:34:01 PM
I think FED may cut 75 points today, considering they MUST protect the garbage Equity Collateral taken in from now on.
That means FED's balance sheet and performance bonuses is now tied to Stock Market!! LOL
Posted by: Sean | Sep 16, 2008 1:34:13 PM
The Financial Philosopher you see the CNBC show where they were talking about AIG with a former FED guy and he was explaining that their balance street is constrained and they were going "They can print! They can print! Print!"
I'd say that is a pretty good indication that there is panic. That and the front page articles on Yahoo pointing out that FDIC is not large enough to cover many failures and asking if your money is safe.
The divergence between that and the VIX, etc. leads me to believe that we are in for some massive hurt if things don't pan out. There is obviously a lot of hope left in actions and almost none left in psychology.
On the other hand that also means that things could snap back just as strongly the other way I guess.
Posted by: mikkel | Sep 16, 2008 1:37:55 PM
can someone please explain what equity collateral the Fed is expecting?
equity in what?
Posted by: JB | Sep 16, 2008 1:41:14 PM
MEH, does it not say something about the missed place value when the market's upward thrust is suppose to come from an un-needed rate cut or another bail-out that will end up not helping a thing in the real economy? Greenburg (retired CEO of AIG) crying on tv does not make for a reason to save the company. Spin-out AIG, the market will survive and be a lot healthier in the long-term. America you've misplaced your priorities - hard work and common sense. Please get them back.
Posted by: Concerned Citizen | Sep 16, 2008 1:41:20 PM
I have a question about one of this morning's data points. I have been reading about how China and other countries have decided not to continue to buy our securities...
Today the "Foreign Demand for Long Term US Securities" was only 6.1 billion...the month before it was 53.4 billion! Statistica glitch, or something more ominous?
http://www.nasdaq.com/asp/EconodayFrame.asp
Bruce in Tennessee
Posted by: Bruce | Sep 16, 2008 1:55:20 PM
Three thoughts: tradeable bottom, AIG-TBTF and printing press.
Posted by: leftback | Sep 16, 2008 2:10:54 PM
No Cut!
Posted by: HCF | Sep 16, 2008 2:16:38 PM
Posted by: Concerned Citizen | Sep 16, 2008 1:41:20 PM
CC, to me, of course, it does.
I only wish I could page Toto to the White Courtesy phone..
CNBC is turning, evermore, into a real-time Kabuki Theatre
http://asnic.utexas.edu/asnic/countries/japan/kabuki.html
Posted by: Mark E Hoffer | Sep 16, 2008 2:17:56 PM
Congrats Barry, you have just been quoted on the Economist:
BARRY RITHOLTZ, a prominent financial pundit, writes with tongue not entirely in cheek that the first lesson from the government’s bail-out of Bear Stearns in March was to “Go Big”. “Don’t just risk your company, risk the entire world of finance. Modest incompetence is insufficient—if you merely destroy your own company, you won’t get rescued. You have to threaten to bring down the entire global financial system.”
Posted by: rep3 | Sep 16, 2008 2:19:15 PM
