June 2, 2014

Lack of fear in market

Throughout the last 12 months the market has risen against a backdrop of very low volume, leading the way for high-frequency traders and others whom have adopted price-momentum and trend-following portfolio strategies to have an exaggerated impact on stock prices.

As mentioned previously, stock prices have risen, investors have grown increasingly complacent, and many strategists and commentators have said that market participants should be ignoring the rotten volumes. 

To be sure, low volume, complacency and even technical divergences are not reliable timing tools.

Nevertheless, the rise to new all-time highs is potentially troubling when these issues are factored in with some continuing fundamental concerns -- for instance, disappointing global economic and corporate profit (and margin) growth, corporate and consumer dependency on low interest rates, the failure of QE to generate a self-sustaining expansion and so forth -- the result of which is a detachment and a blurring in the demarcation line between markets' progress and economic and profit fantasy.

We should be vigilant and aware that the U.S. stock market's risk/reward ratio is eroding with each passing rise in the S&P 500. (How much so we will only know in hindsight.)

Most investors and traders who share my concerns might begin to consider taking down portfolios to below-average exposure to the U.S. stock market now and to continue to do so into any further ramp in stock prices. More aggressive investors might ponder shorting opportunities in the days and weeks ahead. 

In summary, while it is impossible to predict when, Minsky might soon have his moment, as one of the only things we need to fear today is the lack of fear itself. 

Article originally published on http://www.thestreet.com/story/12724898/1/kass-prepare-for-a-minsky-moment.html