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Gauging the Greed Index

April 17, 2018, 12:49 pm

While Wall Street likes to use the volatility index (VIX) as a fear gauge, the truth is that stocks can make big moves to the upside when they become too compelling for traders on the sidelines to ignore. Under those circumstances, the VIX can also be a “greed” gauge, and I think we’re entering one of those cycles now.

At worst, the broader market looked reasonably priced at the end of the first quarter, and while the S&P 500 has come down 5% from its March low it’s still a long way from bubble territory. Investors have proved over and over again that they’re happy to buy the market at 18X 2018 EPS estimates when the VIX swings to greed, and down here at 16X it’s hard to argue that valuations alone justify fear.

Remember, a tax windfall on top of already-robust economic conditions has doubled 2018 earnings growth expectations, so stocks are more attractive than they were six months ago. Back in November, investors bought what they thought would be 9%-10% growth at 18X earnings. That was enough to support the S&P at well above 2,500, so there’s a reason for a little greed with growth tracking at 18%-19% in the current quarter and stocks trading at 16X earnings.

What’s important for us is that the fundamental ground underneath the elevated day-to-day volatility has subtly turned into our friend. The S&P closed up last week, reversing all losses for the month to date and actually posting a gain since the quarter closed.

That said, we’re still navigating the most volatile market in years. As money rotates in search of clear leadership, winning sectors and themes come and go, leaving many stocks swinging in zero-sum circles. That’s why the market as a whole can feel stuck from week to week, but our charts help us keep an eye on the larger patterns and trends behind the grind.

You can see this across the market, too. Volatility has been intense this month – big moves above 1% in either direction are three times more prevalent than normal – but with two out of three of those big moves pointing up, the S&P is reaching back to the record heights investors abandoned during the selling in February.

Looking forward, earnings season will reveal the winners and losers for the coming quarter, so the best way to make money will be to capture the strongest charts that emerge and steer clear of dead money.

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