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When trying to get a handle on investor sentiment, the benchmark of choice for many market-watchers is the CBOE S&P 500 Volatility Index, or VIX. However, this popular “fear gauge” only offers a snapshot of implied volatility, or relative pricing levels, for equity index options, which might not necessarily tell us all we need to know about the mood on The Street.
In theory, stock traders could be overreacting to equity-specific developments that are not relevant to other markets.
That said, there is data that suggests the high levels of complacency in the stock market are also being seen elsewhere. As the chart shows, gauges of implied volatility levels for equity, bond, currency, gold, and oil markets are at or near multi-month lows, suggesting that “the crowd” is unanimous in its belief that nothing untoward is going to happen in the immediate future.
As the chart shows, Apple's stock is tracing out a textbook head-and-shoulders top.
While key support has not (yet) been breached, the fact that the stock's index-relative trend is trading below comparable levels—which normally indicates that institutional investors have been heading for the hills—suggests that it is only a matter of time before the share price follows suit.
There are no guarantees, of course, but standard technical analysis points to a minimum downside target of $300 on the absolute chart, and 20 percent-plus underperformance versus the S&P 500 index.
Given that the broad market peaked around the same time the world's favorite stock did, it might be a good time for those who are betting on further upside for U.S. share prices in the weeks and months ahead to have a rethink.
(Editor's Note: Many of you are familiar with Michael Panzner and his book, Financial Armageddon; I was delighted to receive an email from him last night asking if he could contribute to Slope from time to time; here is his first entry………Tim)
Instigated by the breakdown in heavily-weighted constituent Apple,
the Nasdaq-100's index-relative trend has broken below a key uptrend
stretching back to the early-2009 lows. This uptrend has been tested
five times before now, underscoring its significance.
With investors waking up to the reality that expectations surrounding
the industry are very high, especially amid a synchronized global
slowdown—not to mention the fact that technology has become a very
crowded trade—the recent breach lends further weight to my bearish views
on the sector (see here and here).
Needless to say, the risk is high that we will see a mad dash for the exits.