What the stock market’s ‘black swan’ index hitting an all-time high tells us

2 months ago 20

In precocious June the CBOE’s SKEW Index — a.k.a the “black swan” scale — deed an all-time high. That speechmaking was much than 40% higher than its mean since 1990, which is however acold backmost information extend. In fact, the June speechmaking was 20% higher adjacent than the highest the SKEW reached during the U.S. banal market’s February-March 2020 waterfall decline.

This caller precocious surely seems scary. Yet I’m not convinced that the SKEW’s precocious caller readings mean that much traders than accustomed are betting connected a crisp diminution for the the U.S. banal market, including the Dow Jones Industrial Average DJIA, +0.30%, the S&P 500 Index SPX, +0.34% and the Nasdaq Composite COMP, +0.01%.

In fact, it’s imaginable that the higher SKEW scale speechmaking means conscionable the opposite. (For a fuller treatment of the complexities of the SKEW’s calculation, spot a February 2020 Wall Street Journal file I wrote connected the subject.)

To illustrate, ideate determination are 2 groups of investors: permabears, who much oregon little permanently deliberation that banal prices are astir to fall, and the mainstream consensus, which is bullish. In this hypothetical case, the SKEW Index successful effect would measurement the region betwixt these 2 groups’ forecasts.

Notice, therefore, that determination is much than 1 mode for the SKEW Index to rise. One way, which is what astir presume is the lawsuit erstwhile the scale rises, would beryllium for the permabears to go adjacent much bearish. But the SKEW Index would besides summation if the permabears didn’t change their bearishness and the mainstream statement became much bullish.

There is immoderate grounds suggesting that this second anticipation is happening now. Consider the Crash Confidence Index, a periodic survey introduced successful 1989 by Yale University concern prof Robert Shiller. The latest results bespeak nary notable summation successful the percent of U.S. investors who judge the banal marketplace is astir to crash.

Other grounds pointing successful the aforesaid absorption is the expanding bullishness among short-term banal marketplace timers. For example, timers my steadfast monitors who absorption connected the Nasdaq successful peculiar are, connected average, much bullish present than connected 94% of each trading days since 2000. (That’s according to my firm’s Hulbert Nasdaq Newsletter Stock Sentiment Index, oregon HNNSI.)

It’s besides worthy noting that there’s much than 1 mode for the SKEW Index to fall. Assuming the permabears don’t alteration their forecasts, the SKEW volition autumn if the mainstream statement becomes much bearish. That’s due to the fact that the region betwixt the 2 groups’ forecasts — what the SKEW measures — volition narrow. So alternatively of a falling SKEW suggesting little interest astir a marketplace decline, it mightiness alternatively beryllium signaling accrued concern.

All we cognize for definite from the SKEW’s caller all-time high, successful different words, is that disagreement among investors is peculiarly wide close now. Though we don’t cognize for sure, my hunch is that this utmost disagreement traces to the already-bullish mainstream statement becoming adjacent much bullish. Contrarians should instrumentality note.

Mark Hulbert is simply a regular contributor to MarketWatch. His Hulbert Ratings tracks concern newsletters that wage a level interest to beryllium audited. He tin beryllium reached astatine mark@hulbertratings.com

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