Dow Jones futures fell slightly Sunday, along with S&P 500 futures and Nasdaq futures. The stock market rally looks great as the Dow Jones, S&P 500 index and Nasdaq composite continue to set highs. Apple (AAPL) and Microsoft (MSFT) are thriving with chips such as AMD stock and Applied Materials (AMAT) are thriving. Even Tesla (TSLA) has broken out. But the CBOE Volatility Index, or VIX, shows growing stock market complacency.
And that should worry investors.
The CBOE Volatility Index, the market’s fear gauge, estimates expected volatility based on S&P 500 option prices. Commonly known by its ticker, the VIX highlights intense stock market fear or complacency. Low VIX readings signals investors are bullish. Excessively bullish readings are often marked by at least short-term market tops.
The Volatility Index on Friday fell to 12.05, barely half its level on Oct. 2 as a stock market correction neared its low. It’s the lowest VIX reading since late July and not far from its April low or its August 2018 low.
Both the April and July lows foreshadowed modest stock market corrections. The August 2018 VIX did not immediately trigger a sell-off, but stayed low as the Nasdaq and then the S&P 500 topped out. The VIX finally spiked as the Dow Jones peaked in early October, followed by a severe stock market correction or bear market.
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The S&P 500 index has rallied for six straight weeks and the Nasdaq composite for seven. Advanced Micro Devices (AMD) has advanced for seven weeks. Apple stock has climbed for eight straight weeks and 11 of the last 12. Tesla stock has spiked 99% from its June 3 low. Since Oct. 8, the S&P 500 index hasn’t suffered a one-day loss of more than 0.4%.
Arguably the stock market rally is due for a pullback. It may not happen immediately or be severe. But when the stock market becomes complacent, be alert.
Stock Market Psychology
Stocks rally as investors gradually turn upbeat and pull money from the sidelines. But if “everyone” is bullish and fully invested, who’s left to buy? If Wall Street assumes everything will go well, what news will propel the stock market rally higher?
The primary stock market indicators are the major market averages and leading stocks. From the S&P 500 to Apple stock, the primary gauges are flashing green for the stock market rally. The CBOE volatility index and other psychological market indicators like the put-call ratio are secondary indicators. They are most useful when they hit extreme levels.
The CBOE Volatility Index hit a multi-decade low in late 2017. The VIX is far from those lows. But 2017 was extremely unusual, with the stock market rally showing small, steady gains throughout the year.
Dow Jones Futures Today
Dow Jones futures fell 0.15% vs. fair value, along with S&P 500 futures. Nasdaq 100 futures dipped 0.15%. Remember that overnight action in Dow futures doesn’t necessarily translate into trading in the next stock market session.
The Trump administration plans to give a two-week reprieve to U.S. chipmakers and other suppliers to China’s Huawei, sources told Reuters. That would be far shorter than the 90-day stay set to expire Monday, but will give more time to finalize a more-permanent arrangement.
Hong Kong police stormed the Polytechnic University, where protesters had barricaded themselves. Earlier, authorities threatened live ammunition.
Ford (F) on Sunday night formally unveils its Ford Mustang Mach-E, a crossover electric vehicle that seems aimed at the Tesla Model 3 and the upcoming, slightly larger Tesla Model Y crossover. Tesla, meanwhile, will unveil its “cybertruck” electric pickup Thursday night.
Tesla stock is in buy range from a 340.94 handle buy point from a deep base going back to December.
Current Stock Market Rally
The current stock market rally had yet another solid week, rising on positive China trade news and earnings results and shrugging off negative China trade headlines or weak guidance.
The Dow Jones Industrial Average rose 1.2%, the S&P 500 index 0.9% and the Nasdaq composite 0.8%, with most of those gains coming Friday with AMAT stock surging 9% on earnings. Apple stock climbed 2.2% for the week, Microsoft stock 2.75% and AMD stock 6.3%. AMAT stock rallied almost 11%. Tesla stock climbed 4.5% as it broke out.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) surged 3.6%. The iShares Expanded Tech-Software Sector ETF (IGV) rallied 2.2%, partly due to megacap Microsoft stock but also with some battered former leaders making gains. The VanEck Vectors Semiconductor ETF (SMH) rose 0.8%.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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