Detrick: The VIX is giving us a really interesting signal

Key Concepts

• Dow Jones Industrial Average (DJIA): A stock market index representing 30 large, publicly traded companies in the United States.
• S&P 500: A stock market index representing 500 of the largest companies listed on stock exchanges in the United States.
• NASDAQ Composite: A stock market index that lists all stocks listed on the NASDAQ stock exchange.
• Earnings: The profit a company makes.
• Profit Margins: The percentage of revenue that remains after all expenses have been deducted.
• Guidance: A company's forecast of its future financial performance.
• Bull Market: A period of generally rising stock prices.
• VIX (CBOE Volatility Index): A measure of the expected volatility of the S&P 500 index, often referred to as the "fear index."
• Advanced Decline Line: A technical indicator that measures the breadth of a market by summing the number of advancing stocks minus the number of declining stocks.
• Credit Spreads: The difference in yield between two different types of bonds, often used as an indicator of market stress.
• Regional Banks: Banks that operate within a specific geographic region, as opposed to national or international banks.
• High Yield Bonds (Junk Bonds): Bonds with a higher risk of default, offering higher interest rates to compensate investors.

Market Performance and Earnings

The discussion highlights the recent outperformance of the Dow Jones Industrial Average (DJIA) compared to the S&P 500 and NASDAQ over the past week and month. This surge is attributed, in part, to positive earnings reports from companies like 3M and Coca-Cola. The speakers believe these strong earnings should alleviate concerns about market overconcentration and high valuations.

Key Points:

• Earnings as a Driver: The fundamental driver of long-term stock gains is earnings.
• Early Earnings Season Results: Despite the early stage of the current earnings season, most companies have reported positively.
• Record Earnings and Profit Margins: The market is anticipating record earnings and profit margins for the year, supported by continued strong guidance from companies.
• Labor Market: While acknowledging a lack of recent data, the labor market is described as "weak."
• Bull Market Status: The market is still considered to be in a bull market, with optimism for a significant fourth-quarter rally.

Bull Market Longevity and Historical Context

Ryan presents research suggesting that, historically, bull markets since 1950 have lasted an average of eight years, with none failing in their fourth year. Given that the current bull market has just celebrated its three-year anniversary and is now in its fourth year, this historical data suggests continued strength in the near term.

Key Points:

• Average Bull Market Duration: Historically, bull markets last approximately eight years.
• Fourth-Year Resilience: No bull market since 1950 has failed in its fourth year.
• Current Market Stage: The market is currently in its fourth year, having passed its three-year anniversary.
• Dismissal of Near-Term Worries: Concerns about tariffs, inflation, and the Federal Reserve potentially not cutting interest rates are not seen as immediate threats to continued market strength.

Supporting Evidence/Argument:

• Ryan's research indicates that once a bull market reaches its third year, it tends to continue for an average of eight years, with the shortest observed duration being five years. This suggests that the age of the current bull market does not inherently signal an impending end.

VIX as a Market Signal

The VIX, or "fear index," is presented as an interesting signal. On a recent Friday, the VIX was up around 29, while the S&P 500 closed within 1% of an all-time high. The speakers analyze this scenario by looking at historical precedents.

Key Points:

• High Volatility and Strong Market: The combination of high volatility (high VIX) and a strong market (S&P 500 near all-time highs) is a rare occurrence.
• Historical Parallels: The only two times this has happened in recent history were December 1998 and October 2020.
• Positive Investment Outlook: Both of these historical periods were not detrimental for considering long-term equity investments.
• VIX Drop as a Positive Sign: A significant 10-point drop in the VIX over two days is interpreted as a positive signal, akin to an "all clear."
• Seasonal Strength: November and December are historically strong months for the market, further supporting a positive outlook.

Notable Statement:

• "I hate to say all clear, but that 10point drop we saw on the VIX in two days. Look at history again, that's kind of an all clear." - Ryan

Underlying Cracks and Market Resilience

While optimistic about the bull market, Ryan acknowledges potential "cracks" beneath the surface, specifically mentioning regional banks and housing. However, he argues that these are not necessarily indicative of a market-wide collapse.

Key Points:

• Acknowledged Weaknesses: Regional banks and housing are identified as areas of concern.
• Market Breadth as a Counter-Indicator: The S&P 500's advanced decline line recently hit an all-time high, indicating broad market participation, which typically precedes price movements. This suggests that underlying issues are not yet impacting the overall market breadth.
• Credit Spreads: Credit spreads are not showing signs of massive stress, which would be expected in a market facing significant systemic risk.
• Company-Specific Issues: The problems in regional banks and some lending sectors are viewed as more company-specific rather than a harbinger of a broader market downturn.
• Lagging Sectors: High-yield bonds and regional banks have shown signs of weakness, but this is not being minimized.
• Positive vs. Negative Factors: The overall balance of positive factors still outweighs the negative ones.

Supporting Evidence/Argument:

• The advanced decline line hitting an all-time high is a strong indicator of market health, as historically, these lines tend to peak and decline before broader market weakness emerges. The fact that it's at a new high suggests underlying strength.
• The absence of significant stress in credit spreads indicates that the broader credit market is not pricing in a major crisis.

Conclusion/Synthesis

The prevailing sentiment is one of continued optimism for the current bull market, driven by strong corporate earnings and historical data on bull market longevity. While acknowledging potential vulnerabilities in specific sectors like regional banks and housing, the analysis suggests these are likely isolated issues rather than systemic threats. The market's breadth, as indicated by the advanced decline line, and the lack of widespread credit stress provide a foundation for sustained growth. The VIX's recent behavior is also interpreted as a positive signal, reinforcing the bullish outlook, especially with historically strong seasonal trends in the fourth quarter.