Feb

12

The dictionary defines complacency as “self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies” . I don’t believe it would take much arm bending to convince current market participants that the market may be a tad complacent. In fact, bullish sentiment has been on the rise and is now at its highest level in more than a year. According to the weekly survey from the American Association of Individual Investors (AAII), more than half of all investors polled are currently bullish (51.64%) -Bespoke Investment Group.

Some may argue that complacency is simply the by-product of the intermediate term extant up-trend coinciding with reduced volatility. This has been helping to make intra-day trading more counter-trend within smaller ranges. However, ex-Fed Governor Warsh, sees something more structural in nature, remarking, " Central bank transparency is good, but transparency that delineates future policy breeds market complacency. It threatens to undermine the wisdom of the crowds and the essential interchange with financial markets."

Having laid all their cards on the table, has the Fed removed all doubt; hence, all perceived risk from the markets, essentially eliminating the need for price discovery and any incentives to de-leverage? Traders are certainly demonstrating they are not as quick, as in prior months, to flee the market at the first sign of trouble, e.g., all of the news that circulated about Greece last week, attended by the miniscule range and lowest volume day of the year.

As Mike Aston pointed out, the Fed is supposed to listen to the market for guidance in it's policy decisions; not dictate to the market what it should do, and where it should go. In doing so, The Fed may have manged to both undermine and subordinate the markets. The result is a somnambulent melt-up in asset prices, QE ad inflatam nauseum.

Rocky Humbert writes:

On Bloomberg, it's AAIIBULL Index. I just ran the numbers very quickly. In the past 10 years, there have been 91 weeks when the AAII bull reading have been over 50%.Three weeks later, the average return on the S&P (not corrected for dividends) was +.1% (.065 without rounding). The Stdev of the returns was .00767Over the same period, the average return on the S&P for ALL weeks was -.20% and the stdev was 0.073 SO THE BACK OF THE ENVELOPE CONCLUSION IS THAT THIS IS not A RELIABLE BEAR SIGNAL. Warning: I did this very quickly.


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