The Dow Narrowly Misses Record Highs, but Are Investors Getting Greedy?

The Dow Jones Industrials (DJINDICES: ^DJI  ) managed to regain all of yesterday's lost ground and then some, finishing up more than 65 points, and clawing to within reach of a new all-time closing record. Even though the Dow hasn't put together the huge gains this year that it did in 2013, it has nevertheless held up well even through challenges like a tough winter economy. Yet now, rising levels of investor confidence suggest that complacency might well be at dangerous levels, as the S&P Volatility Index (VOLATILITYINDICES: ^VIX  ) remains at extremely low levels, and the iPath S&P 500 VIX Short-Term Futures ETN (NYSEMKT: VXX  ) hits yet another all-time record low. Are investors being greedy when they should be fearful?


Source: Carl Richards, BehaviorGap.com.

Looking at confidence
The latest survey results from the American Association of Individual Investors showed a huge surge of bullish sentiment following the ascent of the stock market during the past week. In just a single week, the number of bullish investors rose six percentage points, to 36.5%, while bearish investor counts fell by more than three percentage points. Although the number of neutral investors remains well above typical levels, the number of bears is almost a full quarter below the long-term historical average.

At first glance, the proportion of bullish investors might seem like a good reason to feel confident about the market. But sentiment indicators often run contrary to the actual direction of the market. For instance, in 2009 at the market's lows, investor sentiment was terrible. It took the ensuing recovery from those low levels to bring about gains in sentiment, and even years later, many investors still haven't invested in the Dow Jones Industrials or other stocks because of their fears of another market meltdown.

Meanwhile, the S&P Volatility Index has slipped to its lowest levels in years, falling nearly to 11 for the first time since 2007. Specifically, what the Volatility Index measures is the price that investors are willing to pay for protection from market movements using options strategies, and the lack of fear of a sizable correction appears to be driving the VIX lower and taking volatility-tracking products like iPath S&P 500 VIX ST Futures ETN down with it.

All told, the level of complacency on Wall Street is so high that it has to be troubling to contrarian investors. The problem, though, is that contrarians could have made the same case several times in recent years; yet the market has only pulled back slightly on all of those occasions. In the end, it appears that it will take a large and unforeseen catalyst to push the Dow Jones Industrials down into a full-fledged correction. Until that happens, greedy investors might well end up getting rewarded rather than punished.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 30, 2014, at 10:46 AM, chaucer wrote:

    A sensible piece. However, there have been serious corrections in this cyclical bull, just not lately. And while investor sentiment alone may have indicated caution in the past, there are a lot of other factors which have come into play since then.

    Speaking of which, would you care to comment on the indicator which I consider the most dramatic, which is the record high level of margin debt that began a sudden drop in March?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2976431, ~/Articles/ArticleHandler.aspx, 9/21/2014 12:11:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement