Opinion: What the inventory market’s ‘black swan’ index hitting an all-time excessive tells us

In late June the CBOE’s SKEW Index — a.okay.a the “black swan” index — hit an all-time excessive. That studying was greater than 40% greater than its common since 1990, which is how far again knowledge lengthen. In actual fact, the June studying was 20% greater even than the very best the SKEW reached throughout the U.S. inventory market’s February-March 2020 waterfall decline.

This new excessive definitely appears scary. But I’m not satisfied that the SKEW’s excessive current readings imply that extra merchants than regular are betting on a pointy decline for the the U.S. inventory market, together with the Dow Jones Industrial Common
the S&P 500 Index
and the Nasdaq Composite

In actual fact, it’s doable that the upper SKEW index studying means simply the alternative. (For a fuller dialogue of the complexities of the SKEW’s calculation, see a February 2020 Wall Avenue Journal column I wrote on the topic.)

As an example, think about there are two teams of traders: permabears, who kind of completely assume that inventory costs are about to fall, and the mainstream consensus, which is bullish. On this hypothetical case, the SKEW Index in impact would measure the space between these two teams’ forecasts.

Discover, subsequently, that there’s multiple method for the SKEW Index to rise. A technique, which is what most assume is the case when the index rises, could be for the permabears to grow to be much more bearish. However the SKEW Index would additionally enhance if the permabears didn’t alter their bearishness and the mainstream consensus grew to become extra bullish.

There’s some proof suggesting that this latter risk is occurring now. Contemplate the Crash Confidence Index, a periodic survey launched in 1989 by Yale College finance professor Robert Shiller. The newest outcomes point out no notable enhance within the share of U.S. traders who imagine the inventory market is about to crash.

Different proof pointing in the identical route is the rising bullishness amongst short-term inventory market timers. For instance, timers my agency displays who give attention to the Nasdaq particularly are, on common, extra bullish now than on 94% of all buying and selling days since 2000. (That’s in keeping with my agency’s Hulbert Nasdaq E-newsletter Inventory Sentiment Index, or HNNSI.)

It’s additionally value noting that there’s multiple method for the SKEW Index to fall. Assuming the permabears don’t change their forecasts, the SKEW will fall if the mainstream consensus turns into extra bearish. That’s as a result of the space between the 2 teams’ forecasts — what the SKEW measures — will slim.

So as a substitute of a falling SKEW suggesting much less concern a few market decline, it’d as a substitute be signaling an elevated concern.

All we all know for certain from the SKEW’s current all-time excessive, in different phrases, is that disagreement amongst traders is especially vast proper now. Although we don’t know for certain, my hunch is that this excessive disagreement traces to the already-bullish mainstream consensus turning into much more bullish. Contrarians ought to take observe.

Mark Hulbert is an everyday contributor to MarketWatch. His Hulbert Rankings tracks funding newsletters that pay a flat payment to be audited. He may be reached at

Additionally learn: These 15 shares — June’s greatest losers — might grow to be July’s winners

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