Important Signals

Pfäffikon SZ, Switzerland – For quite some time, the market makes a sluggish impression. Many investors look at the VIX index to check if the market is dangerous or not. More often, the VIX index is also called the ‘fear index.’ The VIX is currently reporting on a reassuring level which we have not seen in decades; according to this main measure, nothing is going on. Or does the VIX send out a false signal?

VIX
For years, I no longer use the VIX as an index to measure investor anxiety. The VIX is a simple calculation model and is being overtaken by events. The VIX notes high if the correction is already over. In this regard, the VIX is more a contraindication. The VIX is increasing as the market moves strongly. An old saying at the stock market tells us, “The market is taking the stairs up, and the elevator down.” Investors’ peace of mind has been complacent for over a year and a half. The stock market prices continue to rise, the interest rate is low, profit figures are satisfactory; “Bull markets are climbing the wall of worry.” That geopolitical tensions are sometimes rising high, does not matter apparently.

Profit figures
I have previously indicated that profit figures do not tell me much. Every director knows what the average investor looks at and that this is profit. However, this component is easy to manipulate, especially by large companies, as an accountant could work out for you. I do not suggest that all profit figures are incorrectly prepared, but that they are of elasticity. Furthermore, add the vast valuations of different companies and a child knows that the investor is playing with fire. Based on cash flows, the S&P 500 is heavily overvalued, but nobody seems to care.

SKEW
Perhaps it is an idea that the investor follows the CBOE Skew Index (SKEW). This index measures the expected tail risk of the S&P 500 over a period of 30 days. A tail risk can be compared, more or less, with a so-called “black swan event.” Last March, the SKEW noted an all-time high, which is inconsequential to what the VIX tells you. Based on the SKEW, some investors insure their portfolio with puts or hold more cash. For the moment we have chosen for the last option.

Are we on the eve of 1987 or 2008? No, that does not seem the case. The SKEW only shows that the probability of a (substantial) correction has increased. It is also remarkable that the SKEW has tended northwards for years. This data confirms the subcutaneous feelings of the investor. However, nobody can tell you what exactly is wrong with the current inflated markets. In any event, you are already warned.

It remains for me to wish you a good weekend.


Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in above mentioned shares and has no intention of doing so in the next 72 hours.