Bernard Baruch, one of the world’s most legendary speculators, said, “The main purpose of the stock market is to make fools of as many men as possible.”
Right now, that’s exactly what’s going on. And I assure you, a lot of folks will be made into complete fools in the next year or so.
Chances are though, the folks who are going to look like fools are not who you think.
A Fool and His Money
The amount of bearishness from the market commentators is as strong as it ever was. The recent rally has only strengthened their resolve.
The thing is though, market meltdowns don’t happen when everyone expects them to. They happen when everyone is feeling safe. They happen when the market is overconfident. They happen when no one can find a reason not to buy. Right now, there is none of these.
The big money managers still don’t feel safe. The CBOE Volatility Index (a.k.a. the VIX or the Fear Index) is still at 31. The VIX is calculated by taking the implied volatility of option contracts on the S&P 500.
Simply put, the VIX is a measure of “portfolio insurance.”
When the VIX is high, the cost of insurance is high. It’s like buying catastrophe insurance for a house in Florida. The cost of insurance is high because of all the hurricanes. The perceived risks are high and that risk results in a higher cost.
When the VIX is low, it shows the cost of insurance is low. Right now, with the VIX at 31, it’s still relatively high. For instance, the VIX soared to a peak of 89 during the market extremes of 2008. The VIX, however, fell to less than 10 during the steady bull market between 2003 and 2007.
Basically, the cost of insurance is still high because the perceived risks are high. That perception still hasn’t changed.
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