Stock Market Comfort Zone Is Reached. It’s A Problem. Here’s Why.

Stock market experts call it the fear index and right now it’s indicating the opposite of fear: the volatility index has returned to its comfort zone. The VIX is back in the area where tops tend to form and where some investors begin to feel obliged to jump back in and wait for the profits to roll in.

Major breadth and momentum indicators are failing to confirm that the comfort zone should feel all that comfortable. In fact, it’s the sort of non-confirmation that a reasonable analyst might even find to be troubling especially given the uncertainty created by the crisis in banking and by the Fed’s steady hand in the rate rising business.

Here’s the point-and-figure chart for the volatility index:

The fear index is down to 17.07, all the way down from the 35/34 range seen in 2022 and all the way back to the level seen in early 2023. That it’s this low again is a worrying sign for those who closely follow the index and who’ve seen how the market tends to lose strength at these levels. Nothing’s guaranteed when it comes to stock market indicators but this one, combined with other measures, is worth serious consideration.

Here’s how the weekly chart looks:

So, it’s not back to the very low levels of late 2021 — could it continue to that area, indicating even less fear than now? Sure it could. Is this likely? That’s where these other breadth/momentum-type measures may help out. Do they tend to confirm this analysis of the volatility index?

Here’s the chart that shows the percentage of stocks in the Standard and Poor’s 500 now in bullish point-and-figure patterns:

Note that the April high (so far) is down from the early February high. This is a negative divergence from the volatility index — in essence, a non-confirmation for those of the “lack of fear” indication. Such non-confirmations can continue for longer than you might like but they’re definitely on the “heads up” list.

Here’s the NASDAQ
NDAQ
-100 bullish percent chart:

The index with the big-name tech and social media stocks also shows a negative divergence to the volatility index. It’s not quite as weak as the S&P 500 bullish percent — investors can’t quit Apple
AAPL
— but it’s still a revealing bit of information.

The bullish percent chart for the financial index is here:

The crisis in banking is clearly affecting this index: it’s barely half way back up to the early February high. Note how weak this one is compared to the S&P 500 and the NASDAQ-100 bullish percent charts. The main thing, though, is the clear negative divergence from the volatility index.

Here is the chart for the number of new Dow Jones highs:

Fewer and fewer new highs are showing up on this index, a remarkable divergence from the fear index. Investors might expect new highs to be expanding rather than contracting if the volatility index is back in the comfort zone, but that’s clearly not the case.