~ By Michael Lombardi, MBA
Over the past few months, I warned my readers the stock market had become a risky place to be. While I also suggested euphoria could bring the market higher than most thought possible—to the point of irrationality—the bubble has now burst. Key stock indices are falling and fear among investors is rising quickly.
Please look at the chart below of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). This index is often referred to as the "fear index" for key stock indices. If this index rises, it means investors fear a market sell-off. If it declines, investors are complacent and not worried about the stock market falling.
In just the last 18 trading days (between September 19 and October 15), the VIX has jumped 122% and now stands at the highest level since mid-2012. It has also moved way beyond its 50-day and 200-day moving averages, which shows strength and momentum to the upside from a technical perspective.
Sadly, the VIX isn't the only indicator telling us that investors don't want to be in the stock market. Below you'll find the NAAIM Exposure Index chart, a measure of equity exposure of active money managers (the so-called smart money).
The stock market had a great run over the past five years. While I expected the Dow Jones Industrial Average to more than double from its 2009 low of 6,440 to 13,000 and even 14,000...the Federal Reserve's historic money printing program fueled the index to 17,000. This year will be the first time in five years when stock prices do not rise for the year. And small-cap stocks are having their worst year (in terms of percentage losses) since 2008.
Dear reader, when you have a stock market that rises when the Federal Reserve says it is going to print more paper money (out of thin air) and declines when the Fed takes that punch bowl away, you no longer have a stock market rising on the fundamentals of economic and corporate growth, but on speculation. And that's what I have been warning about all along—real bull markets are not built on money printing.