You can’t blame investors for feeling that the worst of the volatility that plagued markets since October of last year is over. The S&P500 and Dow Jones Industrial Average (“DJIA”) have rebounded approximately 15% from their December lows and are only 7% away from their respective all-time high set in early October. Add to that the recent dovish tone of the Federal Reserve and the better than expected non-farm payrolls and corporate earnings makes increasing stock exposure a tempting move, especially for investors looking to make retirement contributions before the cut-off deadline and not wanting their cash to sit idle.
But is this just a set up for worse things to come?
The DJIA and S&P 500 have rebounded in the same “V” like fashion that markets have been accustomed to for the last few years. Unlike what we’ve seen in recent history, the October sell-off saw the formation of a Death Cross, where the shorter term 50-day moving average crossed below the 200-day moving average, a bearish sign. While some would point out that the bull run continued in the face of Death Crosses in 2010, 2011 and 2015, none of these episodes were accompanied by an up-trending volatility index. The last time we saw an uptrend in the volatility index was the run up to the 2008 market crash and if that doesn’t concern you, note that since October, the DJIA saw fourteen down days of 400 points or more, an unprecedented statistic.
The current uptrend in search interest for select financial news outlets is understood to represent an increasingly negative market sentiment. The logic being, investors will visit financial news websites more often when they’re less confidant in markets. Conversely, financial news website traffic decreases when markets are performing well as investor complacency kicks in.
We discussed in a previous post (here) our concern over the general upward trend in searches for select major financial news outlets. Our financial news search indicator has trended upward since October 2017 and is eerily similar to that which led up to the 2008 market crash. Of particular concern is that nominal search values are materially greater and is understood to represent a higher level of negative market sentiment than the search interest levels observed in 2007-2008. We take from this that market reaction to negative news will be greater than the reaction to negative market news in 2007-2008.
There are still many political-economic wild cards at play, namely the possibility of yet another US government shut down as early as February 15th, the ongoing trade conflict with China and the Brexit deadline just around the corner. The materialization of any one of these events could trigger a major market sell off, which according to the financial news search indicator, could test the depths reached in 2008.