Can’t Put a Price on a Little Fear

05/17/2011 5:21 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Today was the day the market’s orderly decline threatened to turn into a rout, which has Senior Editor Igor Greenwald perversely excited.

Well, that’s more like it.

Until today, the biggest stumbling block on the path to higher share prices may have been the relative complacency of investors (and I include myself among them), many of whom bought in a lot lower in this bull market and have been in no hurry to sell, as indicated by the pathetic trading volume.

Short sellers can only do so much on their own. After the market double in two years, many are not exactly rolling in capital.

And so after more than two weeks of fitful and half-hearted selling, the S&P 500 finds itself less than 3% from its end-of-April peak.

So all the talk of the commodity crash, the Greek default, the looming US debt crisis, the end of QE2, Chinese inflation, rising jobless claims, stagnant industrial production, the disaster that is Hewlett-Packard (HPQ), and declining same-store sales at Wal-Mart (WMT)—not to mention the arrest of the International Monetary Fund chief on a rape charge—add it all up and you get a discount of less than 3% from a three-year high.

It’s been a costlier correction, to be sure, for commodities and commodity producers, serial disappointments like HP and Cisco Systems (CSCO), and the high-fliers that had generated the type of outsized returns that begged to be booked in a tough tape.

But with growth across Asia showing few signs of a slowdown, let alone a crash, long-term bulls in materials and industrials have been understandably reluctant to sell.

Now, finally, stocks are trading with some emotion, periodically racking up triple-digit Dow losses that threaten to (but never quite manage) to morph into a Very Bad Day like those we so well remember. The decline outside a few hot-money sectors has been so orderly it’s actually become worrisome, hinting at the kind of complacency that might require deeper losses.

And if that’s complacency at work, what can we say about the holders of Netflix (NFLX), Amazon (AMZN), and Priceline (PCLN) shares, other than to call them smart? Or about the CEO of General Motors (GM), who has just spent millions on GM stock?

At any rate, with the Options Volatility Index (VIX) nudging 19 at this morning’s lows, the market no longer looks quite as blasé as it was.

And that’s good. A little bit of fear can go a long way, especially when it’s at odds with the prevailing trend.

We needed to see what this market might do on a fearful day. And now we know. Move along. Nothing to see here. Wake me up when September ends.

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