As we witness one of the worst earnings seasons in years, fear is starting to creep into the key stock indices.
Companies in key stock indices, such as the S&P 500, are on track to losing 2.3% in earnings this quarter and expectations for fourth-quarter corporate earnings are being slashed. (Source: FactSet, October 22, 2012.)
If that’s not enough reason to leave the stock market, there’s more.
Two indicators that show the amount of risk and gauge investor sentiment are flashing red signals. This shouldn’t go unnoticed.
First on the list is the Chicago Board Options Exchange Market Volatility Index (VIX). This index shows the volatility of investor sentiment on key stock indices over the short term. When investor sentiment is bearish, the VIX goes higher, and vice versa when investors are bullish.
Since June of this year, the VIX was trending lower. After the recent selloff in the key stock indices, the VIX broke its downtrend and edged above its 200-day moving average (MA)—a big move in favor of bears. The chart below illustrates this:
Chart courtesy of www.StockCharts.com
The VIX breaking above its downtrend means investor sentiment is increasing towards the bearish territory in key stock indices. I have warned about this before; the VIX never made new lows as key stock indices continuously made new highs—blatant non-confirmation of a bull market.
Next, investor sentiment is moving towards bond markets. Yes, I know bonds nowadays are providing next-to-nothing yields, but more investors are moving towards bonds, meaning they are becoming risk-averse.
Since the beginning of this September to October 10, $43.4 billion has gone into long-term bond mutual funds. In the same period, $29.9 billion has been taken out of long-term equity mutual funds. (Source: Investment Company Institute, October 17, 2012.)
These two indicators are yelling that investor sentiment is changing. The rise we saw in key stock indices is slowly losing its glory. As more companies announce their earnings and slash their profit outlooks, the key stock indices will decline. We have all the ingredients for a market sell-off. Be very careful in this market.
Where the Market Stands; Where It’s Headed:
We are near the top of a bear market rally in stocks that started in March of 2009. I’m becoming increasingly convinced this rally (what I refer to as the “bounce” or “sucker’s rally”) is getting very close to its end.
What He Said:
“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that is being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.