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Saturday, September 19, 2009

COMPLACENCY RETURNS TO THE STOCK MARKET


Volatility, we hardly knew ye.

Back in 2006, we pointed to depressed levels of the VIX as an excuse to buy cheap "portfolio insurance" against the likes of terrorist attacks and government-sponsored disasters.

The VIX measures the price investors are willing to pay for forms of portfolio insurance... so it's a great gauge of investor fear.

Back then, only the paranoid thought about home foreclosures, job losses, or market crashes. Nobody cared much about insurance. Which – as any good contrarian can tell you – is precisely the time you should buy some. The VIX sat at an "asleep at the wheel" level of 12.

Disaster hit in 2008... and sent the VIX to a "we're scared to death" level of 80. But as you can see from today's chart, complacency has returned to the market. The VIX has come down the mountain to reach 24. It's amazing proof that most investors have very short memories...

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