Credit risk in the US is at its lowest since 2007 This might seem positive But historically, such drops often signal that markets are becoming overly complacent
We've seen this pattern before: - Asian financial crisis in 1998 - Dot Com bubble in 2001 - Financial Crisis in 2008 Each time, low credit risk was a prelude to periods of significant financial stress
Extreme investor optimism is usually a red flag Recent surveys indicate consumer confidence in the market is at a 30-year high Could this be a warning sign?
A key indicator of market complacency is the Volatility Index (VIX) of the S&P 500 Typically, high VIX levels suggest high market fear, presenting buying opportunities https://x.com/GameofTrades_/status/1794035659789013421
VIX is the expectation of future S&P 500 volatility based on the options market So the higher it is = more traders are hedging against market downside
Currently, the VIX indicates that future S&P 500 volatility expectations are very low This optimism has brought the VIX to its lowest in 4 years And has lead to the S&P 500 hitting new ATH https://x.com/GameofTrades_/status/1794035663928717783
Historically, very low VIX levels have typically not been good for stock investors For instance, in 2007, low volatility coincided with the market peak before a 60% drop Same in 2014 and 2017, leading to a period of market stagnation
Yet, today’s low VIX isn't at all-time lows Throughout history, similar levels of volatility have still seen strong market performance Lasting several years
Interestingly, current volatility levels, while low, are not extreme This moderate calm could actually be beneficial for the market Contrasting with the risks associated with extremely low volatility https://x.com/GameofTrades_/status/1794035671457247717
So, extremely low volatility is a bad thing for the market because it signals too much optimism But reasonably low levels of VIX can be positive for the markets Which is where we are today https://x.com/GameofTrades_/status/1794035674515226928
Recent price action showed a spike in VIX in April 2023 With a 6% pullback in the S&P 500 But the VIX has come back down aggressively ever since Returning to very reasonable levels https://x.com/GameofTrades_/status/1794035676708757544
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