Star-Bulletin news services
Strong investor confidence
a possible pitfall
for Wall Street
NEW YORK || Investors counting on the corporate earnings season to provide a major stock lift were likely disappointed when Wall Street lurched up and down this past week.
There is, in fact, a strong possibility that the market has been driven too high by investor overconfidence.
A key measure of investor anxiety, the Chicago Board Options Exchange's volatility index, had been trading in the 20s. But on Thursday, it dipped to 19.63 -- a 52-week low.
Many believe a reading below 20 may indicate investor overconfidence that makes the market vulnerable to future declines. Put another way, it suggests investors may have bid stocks too high by overestimating how strong the economic recovery will be.
The last time the VIX dipped below 20 was April 2002, at the end of the last bull run before stocks slid to multiyear lows in October. On Thursday, the Dow Jones industrials fell nearly 170 points from an intraday gain of 87 points due, in part, to traders' reaction to the VIX.
"The VIX falling below 20 doesn't happen very often, and that's usually a sign of a market that's topping," said Brian Pears, head equity trader at Victory Capital Management. "A lot of people, particularly short-term traders, take this as a signal that things could become rougher."
Analysts stress that the VIX is just one of many gauges of a market's future direction. Still, there were other signs this past week that Wall Street's stunning rally since mid-March could stall, if not backtrack, despite better-than-expected second quarter earnings.
On Monday, for instance, investors shrugged off a strong outlook from 3M, sending stocks lower as they focused on downbeat profits reports from Merck and Lexmark International. Tuesday also was headed for a loss before news that two of Saddam Hussein's sons were killed lifted the market. And on Thursday, stocks slid on the VIX reading despite a surprising drop in new jobless claims.
For the week, the Dow Jones industrials rose 96.42, or 1.1 percent. They closed yesterday at 9,284.57.
The Nasdaq composite index had a gain of 22.20, or 1.3 percent, closing at 1,730.70 yesterday. The Standard & Poor's 500 index advanced 5.36, or 0.5 percent, finishing at 998.68.
For the week, the Russell 2000 index, the barometer of smaller company stocks, rose 4.12, or 0.9 percent, closing at 468.88.
The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 9,599.36, up 52.70 from the previous week. A year ago, the index was at 8,091.63.
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