Fear of Stock Market Declining Almost Non-Existent

Complacency of Investors Near Record LowThere’s one long-term investing adage that has shown a great amount of success over the years: buy when everyone is fearful and sell when optimism is over the top. This theory worked extremely well when key stock indices fell to their lowest levels. It worked in 1987, in 2000, and then in 2009—three of the greatest times to buy stocks in history.

With this in mind, take a look at the long-term chart of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) below. This index is often referred to as the “fear index” for key stock indices, since it is a gauge/measure of how fearful investors are about the stock market declining. The higher the index goes, the more fear in the market; the lower the index goes, the more optimism in the market.

 Volatility Index Chart

Chart courtesy of www.StockCharts.com

The VIX clearly shows investor concern about key stock indices declining, sitting close to the same point it was at back in 2007—just a few months before stocks started to collapse.

Aside from the VIX flashing red…there are two other key stock market indicators in the trouble zone.

According to the CNBC Market Insider Activity, insiders of companies on the key stock indices continue to sell billions of dollars worth of stock monthly. The sell-to-buy ratio—that is how many shares they sold compared to how many they bought—was 10 to 1 in May, meaning they sold 10 shares for every one share bought. (Source: CNBC Market Insider Activity, last accessed May 27, 2014.) Corporate insiders have been selling their shares at an accelerated pace for some time now.

And corporate earnings of companies in key stock indices are flashing warning signs as well. As of May 16, 467 companies on the S&P 500 have issued their corporate earnings and only 54% of them were able to beat their revenue estimates. (Source: FactSet, May 16, 2014.) While you can fudge earnings via the “financial engineering” methods I have been talking about, you can’t fudge revenue growth. Either it’s there or it’s not.

Given the conditions I have just outlined, I don’t understand how key stock indices can have such significant room on the upside. From what I see, the upside is very limited; investors shouldn’t be looking to buy when the fear of stocks going down is almost non-existent, but corporate insiders are dumping their stock and revenue growth is nowhere to be found.

The best investment strategy right now, in my humble opinion, is to preserve capital, so you are ready to buy when key stock indices eventually do capitulate.