From Financial Advisor magazine:
As the VIX tumbles to lows not seen since before 2008, we must ponder the meaning of this complete disappearance of volatility. Are we really witnessing historically low levels of risk?
The Old Paradigm
The answer lies in neo-classical economics and Modern Portfolio Theory (MPT). Both are thoroughly embedded in the physics-inspired view of the financial economy as a stable and an equilibrium-seeking system. In such a view, if some changes do occur in the financial markets, those changes present no discontinuities and the model has ample time to react by slowly adjusting risk forecasts as the volatility rises. As almost everybody in the world by now knows, currently accepted risk models have time and again shown their inability to deal with financial market reality. Frequent talk of "hundred-year floods" and of "rise in correlations" not only suggests frequent failures of a theory, but also the inability of the theory to learn from past mistakes by incorporating new data. The crash of 2008, completely unforeseen by all traditional risk systems, should serve as the final wake-up call to re-examine the foundations of the old paradigm and consider how sound they really are.
Black swans are circling the American stock market presently based on several indicators I regularly review.
A morning star pattern appeared on the VIX Friday.
The S&P is severely overbought, RSI is diverging and price is at a historic 30 consecutive days above the 5 ema.
The MACD is starting to cross, and the market looks tired.
If a wave 4 pullback would occur immediately, we could see a drop to levels below 1700.
From a seasonal point of view, this would be quite unusual as November to January are typically the market's strongest period.
What would trigger such an unexpected event?
Something quite out of the ordinary - something no one sees coming. A true Black Swan event.
Don't ask what it could be, just prepare for it.
Personally I bought some volatility insurance the other day, as the bungee cord seems quite stretched from its moorings lately.