Are investors being too complacent?

That is the question that an be looked at in several different ways. Some folks rely on anecdotal evidence. Others use the VIX or the Put Call ratio.

The St. Louis Fed uses their own metric which they call the “Financial Stress Index” (STLFSI). It combines 18 different weekly data points. In this morning’s WSJ, Spencer Jakab discusses what this means for equities: A Stress Gauge Suggests Potential Upside for Stocks.  He notes that latest reading (August 30) was “well below the average since December 1993, that reading is less-stressed than four-fifths of all readings over that time.

Given all of the negative headlines on Syria, and the Taper, plus the recent spike in yields, one would have expected markets to be quite skittish.

The key question is how skittish — how volatile, and how extreme are the reactions. Therein lay the tricky aspect of using sentiment: It only really indicates a potential market reversal when it hits an extreme level.

Jakab notes:

“The lowest readings in history came in the early weeks of 2007 when stocks were booming and the first signs of the subprime-mortgage crisis were about to appear. The highest 12 readings all came in late 2008 following the collapse of Lehman Brothers.”

As the chart below shows, we are not currently anywhere near the levels of mass complacency. This suggests that markets are still climbing “the wall of worry” — and could still have further to run. YMMV


St. Louis Fed Financial Stress Index (STLFSI)
Source: St. Louis Fed


A Stress Gauge Suggests Potential Upside for Stocks
Spencer Jakab
WSJ, September 8, 2013

Category: Investing, Sentiment

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Complacency Versus Wall of Worry”

  1. Backcreek says:

    “As the chart below shows, we are not currently anywhere near the levels of mass complacency.”. I’m not sure I’m following the logic here. From the chart, it would appear “average” complacency would be at the “zero” line. Current complacency would be about -.5. Complacency in 2007 before the 2008-2009 bear market about -1.2, but at the peak of the market in 2000 it was about zero and never rose above 1, even during the bear market of 2001-2002. What conclusions can be drawn from what are essentially two data points?

  2. winstongator says:

    What do the period up to 2000, and 2008 have in common? Not entirely the level of the index, but its consistency. Plot the derivative of that index on a 3-month average and you see those periods are different than today.

  3. [...] Are investors too complacent?  (Big Picture) [...]

  4. [...] As they say: “Bull markets climb a wall of worry” (Big Picture Blog) [...]

  5. [...] Are investors too complacent?  (Big Picture) [...]