Stocks keep going up. But the market indicators are getting stranger and stranger.
On the one hand, the VIX, the S&P 500 Volatility Index, commonly called the “fear index” because it’s a measure of how nervous investors are, is back to levels of complacency that it last saw at the October 2007 and May 2008 highs, according to John Murphy at Stockcharts.com. (October 2007 was the bull market high and May 2008 was the high in the first bounce of the bear market.) At the very least, this reading on the Volatility Index indicates that stocks are now overbought and are vulnerable to a pull back.
Ah, you probably want to know when, right? The problem is that overbought markets can stay overbought for quite a while.
At the same time that the VIX is flashing “caution,” however, other indicators are giving a green light.
According to Dan Sullivan at TheChartist.com, on March 23 the advance/decline line (a moving ratio of advancing and declining stocks) reached a high for the rally that started on March 9, 2009. On top of that the Dow Jones Industrials and the Dow Jones Transports both made 52-week highs last week. According to the widely followed Dow Theory that flashed a buy signal.
As I’ve said many times, I’m not a good technical analyst—which is why I subscribe to Murphy and Sullivan. But this does feel to me like an extended market but one still with room to run. We’re coming up on the end of the quarter and a new earnings season. And first quarter 2010 earnings still face an easy comparison with truly terrible first quarter earnings in 2009. I think that should be enough to keep the rally moving higher—enough for an overbought market to get more overbought if you want to take a pessimistic view.
My worry is still the second half of the year when earnings comparisons get tougher and when developing world economies, where central banks have raised interest rates to fight inflation, are showing slower growth.