KUALA LUMPUR, Sept 8 (Bernama) -- Bursa Malaysia closed almost flat on Tuesday as buying interest rotated away from index heavyweights towards smaller-cap construction stocks, with sentiment affected by geopolitical uncertainty, said an analyst. At 5 pm, the FTSE Bursa Malaysia KLCI (FBM KLCI) eased 0.39 of a point to 1,714.40 from Monday’s close of 1,714.79. The benchmark index opened 1.65 points lower at 1,713.14 and moved between 1,710.44 and 1,714.50 throughout the trading session. The broader market was almost evenly balanced, with decliners leading gainers 548 to 546, while 598 counters were unchanged, 1,107 were untraded and 25 were suspended. Turnover expanded to 4.13 billion units valued at RM3.14 billion from 3.60 billion units valued at RM2.45 billion on Monday.
Stock traders are becoming increasingly bullish and complacent, as evidenced by a new all-time high for the CBOE SKEW Index (.SKEW.US). While many market commentators suggest this rise indicates heightened concerns about a potential Black Swan event, the reality may be more concerning from a contrarian perspective.
Understanding the SKEW Index
The SKEW Index measures the divergence between two groups of traders:
- Consensus Majority: Traders with a bullish market outlook.
- Super-Bearish Minority: Traders anticipating extreme downside risks, such as a market crash.
When the SKEW rises, it reflects a growing gap between these two perspectives. However, this gap can widen in two ways:
- Increased Bearishness: The minority becomes more concerned about a crash, while the majority remains steady.
- Increased Bullishness: The majority becomes less concerned about risks, while the minority maintains its bearish stance.
What the Current SKEW Indicates
Recent data suggests the latter scenario: the majority of traders are becoming more bullish, while the bearish minority remains unchanged. This indicates complacency, a hallmark of late-stage bull markets.
Supporting Evidence
Yale's Crash Confidence Index:
- A survey conducted by economist Robert Shiller reveals that individual investors are now less worried about a market crash than at any point in the past 15 years.
Historical Correlation with Bull Markets:
- Over the past 15 years, the SKEW Index has risen in sync with bull markets. A 56.3% correlation coefficient between the SKEW and trailing 12-month S&P 500 returns supports this relationship.
Implications for Investors
Why a High SKEW Is Bearish
- Overconfidence: Rising SKEW amid bullish sentiment suggests markets may be overlooking potential risks.
- Contrarian Signal: From a contrarian perspective, extreme optimism can precede market corrections or crashes.
Potential Risks
- Economic Slowdown: Despite market euphoria, macroeconomic indicators such as slowing growth or persistent inflation could undermine confidence.
- Geopolitical Events: Unforeseen global events remain a constant wildcard for financial markets.
- Fed Policy: Unexpected shifts in monetary policy could derail bullish momentum.
Key Takeaways
While Wall Street appears unconcerned about a market crash, this complacency itself is a warning sign. Investors should remain vigilant and consider defensive strategies, such as:
- Diversifying portfolios to mitigate risks.
- Allocating funds to safe-haven assets like gold or treasuries.
- Maintaining cash reserves to capitalize on potential market downturns.
The bottom line: When the majority of the market stops worrying about risks, contrarian investors should start paying attention.
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