Equity investors are more complacent than they've been in years. Is it time to get worried?
April 24, 2004: 10:36 PM EDT By Mark Gongloff, CNN/Money senior writer
NEW YORK (CNN/Money) - More investors think U.S. stock markets are in for smooth sailing than at any time in nearly eight years, according to a key gauge of volatility expectations. When things are this quiet, is it time to start worrying, especially with Fed Chairman Alan Greenspan promising interest rates will rise?
As of Friday, the Chicago Board Options Exchange's Volatility Index (VIX) was holding steady well below 15, near its lowest level since late 1996. It was the third time this year the index dropped below that level.
The VIX collects prices in the options market to see how choppy investors think the water's going to be in the near future -- the higher the prices, the greater the expected churn. Some market analysts, always on the lookout for the contrarian indicator, see too much calm and confidence as a sign that things are about to get interesting.
"Are we going to break up or down? It's hard to say at this point," said Carlos Asilis, portfolio manager at Vega Asset Management. "What is becoming clear is that buying volatility may not be a bad thing."
In the late 1990s, when stocks got really bubbly, the VIX mostly stayed well above 20, reflecting the churn in all those dicey dot.com stocks. Whenever it dropped below 20, market analysts got nervous.
In early 1998, the VIX slipped below 20, signaling calm waters ahead. A few months, one Asian currency crisis, one Russian crisis, one stock run-up and one brutal stock sell-off later, the VIX was proven wrong -- to say the least.
In mid-1999, the VIX fell below 20 again. The only thing that followed was the bursting of the Internet stock bubble.
So should investors be worried that the VIX is so low again? Not necessarily. For one thing, the economy's strong, earnings are great and Greenspan did promise to take it easy on interest rates -- maybe all this happy news means the market is justifiably calm.
For another thing, the VIX has been below 20 for a fairly long time, since November of last year, without any subsequent disasters. As CNN/Money wrote earlier this year, a surge in convertible bond issuance could have something to do with keeping the VIX at a sustainably low level.
Before the dot.com bubble started swelling up, the VIX spent years below 15 -- there's a chance we're simply moving into a similar era of calm, according to Bernadette Murphy, chief market analyst at Kimelman and Baird.
"This is what a lot of us who have always looked at the VIX have a reservation about -- it's not the late 1990s any more," Murphy said.
The only problem is, there are several other indicators -- including a scant amount of investors placing "short" bets, in which they make money if stock prices fall -- that optimism has gone a bit too far, according to Paul Nolte, director of investments and technical market analyst with Hinsdale Associates in Hinsdale, Ill.
"Right now sentiment is all loaded on one side of the market," Nolte said. "It gives you the idea we're running late in the game -- we may be in the process of putting in a short-term top in the market."
Oddly enough, even with everything coming up roses, the S&P 500 couldn't cross its recent resistance level of 1,150 this week. If all the news continues to be good next week, then it finally could break out and move higher.
The week will bring another slew of earnings reports, which are expected to continue the quarter's trend of surprising strength -- earnings for companies in the S&P could post gains of some 25 percent over a year ago, according to earnings tracker First Call.>>
Market Data 
Markets 
AI
