The Disconnect Between Investors and Stock Markets
It seems that every day we are advised by professional investors and others that the stock market is overvalued and to sell everything. And yet the markets (e.g. Dow, S&P, Nasdaq) continue to grind higher. This appears to be a disconnect between human observation and market behavior.
One explanation is that machine trading (HFT, Algo’s) has taken upon a life of its own. While algorithms were originally designed to trade far faster than a human could, but following human instruction, some think that subsequent patches and modifications have moved the programs towards independence from human thought.
Another, related issue is the huge increase in ETF’s. These funds automatically rebalance to stay within mandate. Such rebalancing pays no attention to whether the market is expensive or cheap.
In any event, we are now hearing again from those who remain invested that ”this time is different”. There is widespread complacency, as exemplified by the VIX (volatility S&P) chart below, which is near an all-time low.
Chart Courtesy Yahoo! Finance
If the market really is overvalued as so many are saying, then we are in for an interesting future. While the market may continue to grind higher, any shock could see a precipitous fall.