Fake and Bake

When CNN talks about the fear index as an optical illusion, we know "peak complacency" is near.

Fear gauge at 5-year low

NEW YORK (CNNMoney) -- One look a the market's fear gauge and it sure looks like investors are decidedly less fearful. But look a little deeper and there are signs that volatility could be right around the corner.

The VIX, the Chicago Board Options Exchange's index of market volatility, hit its lowest level since 2007 this week, following news that most major banks, except Citigroup (C, Fortune 500), Ally Financial, SunTrust (STI, Fortune 500) and financial firm Metlife (MET, Fortune 500), had passed the U.S. government's so-called stress
A series positive economic reports were already boosting optimism about the health of the U.S. economy.

The VIX bounced off its five-year lows early Thursday but is still down nearly 70% from recent highs hit in August 2011. And at 15.31, it has a ways to go before it hits the fear tipping point of 30.

For now, it's suggesting trading will remain in a narrow range for at least the next month.
Remember the wild gyrations of the Dow Jones Industrial Average (INDU) in the second half of 2011, when a several hundred point drop became de rigueur?
The VIX rose to nearly 50 in August 2011, after Standard & Poors' downgraded the credit rating of the United States. Even as the VIX soared in late 2011, it stayed well below its peak level of almost 90 hit in October 2008 -- after Lehman Brothers collapsed.

When this exceptional level of complacency will reverse, I do not know. Despite the bearish fundamentals coming out of Europe, China, Canada, Australia, and parts of the US, the market has gone significantly higher than I expected, and has punished me accordingly. So, stick to the charts and do not try to outguess the market as it can be a painful experience. Nevertheless, my eye is firmly fixed on the VIX, as this should quickly tell us when the next downturn begins as this is truly a fake and bake market. The only other thing on the radar at the moment is the massive Greek CDS auction on Monday. Stay tuned.