Weighing The Week Ahead: Are Investors Too Complacent?

The upcoming calendar has plenty of data in a holiday-shortened week. There could be OPEC, or Black Friday news. In spite of this avalanche of information, I expect commentators to look for an organizing principle. In a week when many will be giving thanks, there will be scrutiny of the new market highs.

Many will ask: Are investors too complacent?

A Personal Message

It has been a very good year for WTWA and our followers. I have had a lot of help, so I have personal thanks for many.

My original editor at Seeking Alpha who helped to develop this concept. She does not like to be named, but she knows who she is, and I think of her each week.

The continuing support and help from the Seeking Alpha editorial team.

Abnormal Returns – the gateway to the investment world and an early blogging colleague. Tadas has both guided me to great information and helped me to find many new friends.

Sources that pick up and circulate my work, especially including Doug Short, Advisor Perspectives, Global Economic Intersection, and Investing.com.

My friends on Twitter who provide pointers and help me reach new readers.

The many great sources that I rely upon each week.

And most of all – my readers. Without the comments, ideas, and encouragement, I could not tee it up each week.

I must not leave out Mrs. OldProf, who has given up many Saturdays and Friday nights while I was writing. I might take off next weekend or do an abbreviated column while enjoying the visit of her family.

Prior Theme Recap

In my last WTWA I predicted that media would focus on commodities, with special attention to the rebound potential. Instead, there was plenty of discussion of the Fed Minutes and the energy discussions were all pretty bearish. Even looking at the week’s history it might be hard to come up with a single theme.

By the end of the week, Melissa Lee and the Options Action traders were discussing some of the rebound action in commodities, with a focus on FCX (which I have been using as an example). But no excuses. Sometimes the theme is difficult to capture in advance.

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week’s Theme

There is plenty of economic data this week, mostly crammed into two days of releases. On Friday those who are working will be greeted with the results of the OPEC meeting and early releases about Black Friday sales. It is a very tough week for my “Guess the theme” challenge.

I am going to fudge the exercise just a bit this week by discussing “complacency.” This has been a frequent recent pundit theme and is certainly a candidate for a week where it could be confused with “giving thanks” for past gains and warnings to take profits. I will venture out onto that limb and suggest that the week will feature the question: Have investors become too complacent?

The basic argument for this viewpoint is twofold:

The market is making new highs despite a long list of geopolitical concerns and “nosebleed valuations.” Is everyone blind? These sources colorfully describe investors as “sheeple” who have been sold a bill of goods. It will end badly.

Low volatility is a sign of complacency. The low VIX and even the low St. Louis Financial Stress Index indicate danger. Beware!

The theme is worth a separate post, but let me highlight the most obvious responses:

Those who choose to buy stocks are not ignorant of the list of worries or the crash warnings. They have the same information as the worriers, but they have reached a different conclusion. Check out Richard Bernstein’s list of fifty concerns that have kept people out of the market. It is a great list, perhaps helping people to understand the most difficult concept for investors – the Wall of Worry. It was a factor behind my Dow 20K forecast.

Thinking about a group of people, or a market, as if it were an individual but be done with care. It may be a useful shorthand, but you cannot forget the underlying dynamic. Right now the market has been trading in a narrow range. That might represent an uneasy balance between those with sharply divergent viewpoints. The result might change rapidly with new evidence. Think of a tug-of-war, with two sides evenly matched. Do these men look complacent?

I emphasize risk control and have special methods for avoiding complacency. You should, too. More about that in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.

It is better than expectations.

The Good

The news last week was mostly good, even better than stock prices suggested.

Inflation remains low. The stubborn unwillingness of many investors to accept this conclusion is a big source of error – mostly from misreading the Fed and buying gold. Remember when many complained about using core inflation because food and energy were important? Now that energy prices are lowering the overall inflation rate many complainers have moved on to a new argument. Rex Nutting has a nice article explaining that “stuff” that we buy is getting cheaper while services are not. Barron’s shows that core inflation is better described as the trend, including this chart: