Should investors be scared by the lack of fear in the stock market as the Dow Jones Industrial Average hits 16,000 for the first time ever?
Clearly, investors are feeling good about stocks now that the U.S. government shutdown is over and amid the perception the Federal Reserve won’t taper its bond purchases anytime soon.
The CBOE Volatility Index fell below 12 on Friday for the first time since August. The VIX, Wall Street’s so-called fear gauge, is down more than 30% this year.
The VIX is a measure of expected stock market volatility for the next 30 days, and is based on S&P 500 options. Leading the VIX lower in recent weeks is a combination of bullish options bets on the S&P 500 and a relative lack of investors seeking insurance against declines in the stock market, The Wall Street Journal reports. However, the premiums in longer-dated VIX futures contracts suggest that investors see volatility picking up in early 2014 after the holidays.
The VIX rose Monday as U.S. stock indices notched fresh record highs, and traders will be watching to see if the 12 level provides support as it did over the summer. This area has also coincided with peaks in the S&P 500 over the past year and the VIX’s low level points to complacency in the stock market, says Investors Intelligence technical analyst Tarquin Coe.
Some investors have been waiting for a pullback to get back into stocks, yet it has been over two years since the S&P 500 has seen a 10% correction from a high. Investors are afraid of buying at all-time highs right before a potential sell-off with the S&P 500 reaching 1,800 for the first time in history.
So what are investors to do? One strategy to overcome this fear is to nibble at stocks with a dollar-cost averaging strategy, rather than buying all at once.
Chart source: Investors Intelligence
Photo Credit: Justin in SD
DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results.