Is the market too Sanguine?

This is a question we must ask ourselves after the so-called fear index, known as the COBE Volatility Index (VIX) tumbled for the tenth consecutive session. After spiking to multi-year highs in August, the VIX has come down a ton and it has been off 23.6% over the past 52-weeks.  The index is used by many as a contrarian-trading tool, although I must admit the index seems to reflect the obvious rather than predict the future.  (I know big time money managers who incorporate data to predict the future; I just never learned how to add it to our models.)

Stating the obvious – investors are no longer scared; on that note, it must be underscored that the individual investor has been bailing out of U.S. stocks for so long that it is inconsequential.  It might be a proxy for professional investors; that term is a misnomer these days, as the pros chase performance on a minute-to-minute basis.  However, down 10 days in a row is huge-it must signal something.-

I would like to think that the VIX represented a view of the market in the longer-term such as three to five years, even ten years from now.  Granted, if we get a Bernie Sanders into office or a Hillary driven by the far left, all bets are off. As much as I have asked everyone to hang tough during the Obama years, it is because America doesn’t fall off a cliff overnight, no matter how poorly the Commander-in-Chief is driving it.

18,000?

Two weeks ago, the thought of the Dow at 17,000 seemed far-fetched for a lot of investors. Now, some are quietly thinking 18,000, or maybe even a re-test of the all-time high by the time the big crystal ball drops in Times Square.  However, before any of that happens, there has to be major pockets of earnings beats and more confidence and guidance.  The good news is that the bar is low; the bad news is that it is low for a reason.

For the Dow, a close above 17,165 sees little resistance up to 17,500.

Drug Market Bust

Yesterday, it’s unlikely any local newspaper or television telecast mentioned the bust at Eli Lilly & Company (LLY) of a drug in phase III testing.  The drug, ‘Evacetrapib’ was designed to help patients with heart disease; after testing 12,000 patients, the company pulled the plug.  The company took a $90 million charge but considering how far along the trials had come, the costs were substantially more.  Shareholders felt the brunt of the damage as the company shed almost $7.0 billion in market cap valuation.

Moreover, I am not justifying price-gouging, but capping drug company profits will be the death knell of the industry and interrupt the trend of longer life spans.  Some things are worth the price of admission.

Today’s Session

The market will open under pressure as the China trade data was yet another disappointment. Based in US dollar, imports were -20.4% and imports -3.7% (down for the eleventh straight month a new record).

There’s also a report out from the IEA on oil being oversupplied through 2016. Initially, crude was off on the observation, but has turned slightly positive as the report is modeled on data from the IMF which revises its GDP data every time the seasons change.  Moreover, there doesn’t seem to be any consideration for all the rigs taken offline in America.

The most worrisome corporate news might be Ryder, the truck rental and logistics provider, which lowered guidance for the rest of the year in part to what management is calling a “temporary execution issue,” related to its record fleet growth. The street isn’t buying that spin and the stock could be down 10% today. The stock hit $100 back in April. For me, the news highlights the feeble nature of the recovery and why the stock market has been sideways to a lot lower recently.

That said, from a valuation point of view, this is still not the kind of market that is wildly overbought. But it’s still struggling and needs to bigger economic proxies to have clear cut good news.