Complacency Risk Is High

As I writing this past weekend's newsletter "A Technical Review Of The Markets" it really dawned on me just how complacent investors have become on the economy, the markets and risk in general.  The mainstream media, and most of analysts, are looking at recent improvements in the economic data as a sign that the economy has begun to make a turn for the better.   This view is further supported by the rise of the stock market. 

With a couple of breadcrumbs, a sprinkle of "hope" and a cup of optimism - analysts, economists and investors have whipped up the perfect concoction by extrapolating recent upticks into long term future advances.  However, this is a game that we have seen play out repeatedly before. 

Take a look at the chart of the volatility index versus the S&P 500.  The media and analyst community were convinced early on in 2007, even though we did protest heavily, that the economy would experience a "Goldilocks scenario" and the economy would "muddle through."  As the market declined, and one indication after another showed that the coming crisis would be far worse than people imagined, investors remained complacent until the "Oh $#@!" moment occurred.  Unfortunately, by that time it was far too late.  The same thing occurred in 2009 as the Fed intervened with quantitative easing and then again in 2010 with Q.E. 2.   Each time, as the volatility index retraced back to levels of complacency, the seeds were sown for the next "Oh $#@!" ...