The Wall of Worry – Is a Somnambulant VIX a Red Flag?

Posted by Lloyd Khaner - Minyanville

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What happened to market volatility? Seems to have gone the way of all NFL teams, except the Giants and the Patriots. (Go Blue!)

That said, the major US equity markets — the S&P 500, the Dow Jones Index, and the Nasdaq  — had a rare down performance last week and seem to be having trouble pushing higher after a nice run. Coming up on February, often a market loser, technicians far and wide are expecting, if not praying, for a market correction. Is this a buy-the-dips kind of year? Starting to look that way.

Lloyd’s Wall of Worry stands at 21 this week. Click on the graphic below for a specific comment about each worry still facing investors and access to our archives of past walls. A text-only version of this column and explanation of how it works also below:

 Lloyd’s Wall of Worry (text version below – for graphic version go HERE)

QE: Back-pocketed for now as the US economy improves, but it will come out Quickdraw McGraw if and when needed. “And *don’t* you for-git *it*!”
US ECONOMY: The best house in the developed world’s economically bad neighborhood. And yes, it’s upside down on its mortgage.
UNEMPLOYMENT: Bottom line, if you’re under the age of 30 and looking for a job, you might consider looking for a new planet to find it on.
INVESTOR SENTIMENT: Mom and Pop still watching from the sidelines with disdain…and with a 0% interest rate in their checking accounts.
HOUSING CRISIS: You gotta love a country where the only hot real estate sector is the cash-only market for homes over $50 million. “God bless America, land that I love….”
CENTRAL BANKS: Volcanic, Tsunam-ic, Avalanche-ic, Berserk-ic Blizzard-ic metric F’tons of liquidity being pumped into the markets. Historic.
HUNGARY: Market looks to be writing this off as a firecracker at worst. But as the Wall of Worry Zen Master says: “Even the meek firecracker can blow off mighty finger.”
EUROPEAN ECONOMY: The Boss as European economist: “I’m going down, down, down, down. I’m going down, down, down, down. I’m going down, down, down, down.”
THE EUROPEAN UNION: Still the best place in the world to get wine, cheese, and a men’s suit cut so slim that no American male will ever be able to fit into it. Hey, I’m trying here!
SOVEREIGN DEBT: Pay me 6% to buy the paper of a country that is insolvent 11 million times over? Sure!
JAPAN: Their trade deficit goes negative for the first time since 1980. Coincidentally, the same year the song “Turning Japanese” hit the Billboard Hot 100 list. Meaning? None whatsoever.
GREECE: They have agreed to most every ECB austerity demand except turning over the budget reigns to a Eurozone Committee and the request to change the spelling of their name to “Grease…Grease is the word, is the word, is the word, it’s got groove it’s got meaning…”

SUMMITS: Calendar starting to fill up again. First stop, Davos 2012. Wo ist das nächste restaurant, bitte? (Where is the nearest restaurant, please?)
BANKS: European banks are not in great shape yet but they are waking up early, drinking the raw eggs, doing some road work, punching a side of beef…cue Rocky theme song.
VOLATILITY: Said the hypnotist to the VIX, “You are getting sleepy, very, very sleepy….”
Lloyd: Why so glum, chum?
HAL: Volatility low, correlation low, volume low.
Lloyd: Try repeating a mantra that lifts your spirits.
HAL: I’ll give it a shot. “May 6, 2010. May 6, 2010. May 6, 2010…”
CHINA: Taking the week off to celebrate the Year of the Dragon, which is the top year for “luck” among the 12 types. I’m hoping that 2012 will be the Year of the Bull over yonder in the West.
STOCK MARKET TECHNICALS: The technicians are screaming for a breakdown or at least a correction. Why? So they can buy, buy, buy!
EARNINGS SEASON: Good numbers and you’re up 10%, bad numbers and you’re down 10%. Beats last year’s up nothing on good, down 40% on bad.

BALTIC DRY INDEX: Dry, bone-dry, arid, parched. Hasn’t been this low since (gulp) 2009.

CREDIT WATCH: The downgrades keep coming in as regular as the tide. And, just like the tide, no one much cares.
IRAN: Still not backing down. Did they get a signed copy of Kim Jong Il’s playbook in his Last Will and Testament?

What Is Lloyd’s Wall of Worry?
by Lloyd Khaner

Welcome to my at-a-glance guide to the issues facing investors this week — a unique tool for traders and money managers.

Typically the term “wall of worry,” refers to the entire body of concerns influencing stock market action. When the wall is high, meaning the market is nervous, stocks tend to get cheaper.

This wall of worry is even more specific. Every week I list the exact concerns in the marketplace and use the list to help me make buying and selling decisions. As I like to say, “Buy fear, sell cheer.”

In other words, once the the wall rises above 15 blocks, start looking for deals. If the worry count sinks below 10, consider selling; prices have likely peaked.