Jun 4, 2014

The Four Most Dangerous Words in Investing: "This Time, it is Different"

As the US stock market defies expectations and grinds to a new high everyday, major financial news channel started to broadcast articles such as ,"Sell in May and go away? NOT this year!" and "Why Calls for a Big Market Correction May be Wrong". These headlines got me even more worried. To quote Sir John Templeton, "The four most dangerous words in investing  are: 'This time, it is different'"

Ever since I wrote the article 4 Possible Macroeconomic Signals of a Market Correction, there has been much feedback on how useful the indicators are. So the question is, what is the state of these signals to date as compared to the time I wrote? Let me sum them up. 

VIX Volatility Index
The Greed and Fear Index. The lower it goes, the more complacent the market is, meaning the chances of a fall in the stock market gets higher. It has fallen from 13.7 to 11.87 since than. The last time VIX fell below 12, was during 2006, just before the 2007 financial crisis. 

BDIY Baltic Goods Index
The cost of freight index. The lower the price, the more excess supply in cargo space in the ships that move goods around the world. It has fallen from 1021 to 948. 

Technical Indicator: Price to Volume
For those who are familiar with technical analysis, you will know that a strong upward trend must be accompanied by strong volume, or many a times, the trend will tend to break down. The US stock indices have been drifting upwards on decreasing volume. Another worrying trend. 
So my best advice to investors for now: 

On the Economic Front
Economic data are still mix for the month of May. US GDP for 1st Quarter showed contraction, reigniting hopes that this will encourage the US central bank to maintain the low interest rates. Meanwhile, on the European front, latest inflation figures show that there is a high risk of the European economies falling into deflation, prompting investors to believe that the European Central Bank will let loose another round of monetary barrage, and effectively push interest rates to negative. Things seem to be looking better over at China, as the targeted stimulant by the Chinese government seems to be working out. In short, the global economy is still a mess!

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