by Pater Tenebrarum, Acting Man:
Anecdotal Flags are Waved
“If a shoeshine boy can predict where this market is going to go, then it’s no place for a man with a lot of money to lose.”
– Joseph Kennedy
It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if he wanted a few stock tips. Kennedy was amused and intrigued and encouraged him to go ahead. Bologna wrote a few ticker symbols on a piece of paper, and when Kennedy later that day compared the list to the ticker tape, he realized that all the stocks on Bologna’s list had made strong gains. This happened a few months before the crash of 1929.
Kennedy sold all his stock market investments over the next several months and put the money in what he considered the safest banks. He had already made a fortune in the bull market, and reportedly augmented it later by going short in the bear market. We are pretty sure his meeting with the market-savvy shoe-shine boy wasn’t the only reason for which he decided to sell. He did mention the anecdote later in life though and the experience served to solidify a conclusion he had already arrived at: It was very late in the game and the market was likely tocrack badly fairly soon.
We felt reminded of this story when a good friend (who invests for a living) visited us this summer. He inter aliatold us about an acquaintance of his, whom he described as an autopilot investor who only very rarely looks at the market and has a record of getting the wrong ideas at the wrong time. His latest idea was noteworthy: he thought it would be a good idea to “sell volatility” (by writing puts, if memory serves). This was in July, just before the VIX reached a new all time low.
In 2008, the VIX hit a high of 90 points, which was in fact the technical target we were eying at the time. In both 2010 and 2011 it jumped to approximately 47 points. In 2014 it made a high at 32 points, and in 2015 it streaked to 52 points. On these occasions put writing was not very popular with the people mentioned above. But they loved the idea with the VIX between 9 and 11.50. Go figure – click to enlarge.
One shouldn’t jump to conclusions from this just yet – if it wasn’t well-known before, it should be by now: the VIX can remain subdued for a very long time. It only tells us that there is very little concern in the market – there is little demand for option hedges and traders are more inclined to sell volatility than to buy it. And similar to how high bullish sentiment during a bull market is not a contrary indicator most of the time, the lack of concern can be well founded for extended time periods.
We have good reason though to suspect though that this particular game is quite long in the tooth as well. We are going to discuss developments in sentiment data in detail in a separate post. Still, here are a few observations in this context. Sentiment has become even more lopsided lately, with the general public joining the party. It may not “feel” like the mania of the late 1990s to early 2000, but in terms of actually measurable data, the overall bullish consensus seems to be even greater than it was back then.
For instance, mutual fund inflows rose to record highs earlier this year. Along similar lines, here is a recent chart that aggregates the relative cash reserves of several groups of market participants (including individual investors, mutual fund managers, fund timers, pension fund managers, institutional portfolio managers, retail mom-and-pop type investors). It shows that there is simply no fear of a downturn:
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