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With stocks down sharply on Wednesday afternoon, many investors must be asking themselves if this is it – the start of a correction. After all, U.S. indexes have been hitting multi-year highs recently and the Dow Jones industrial average just scored its best first-quarter performance since 1998, bringing on this-can't-last feelings.
Sure, there are all sorts of fundamental issues to fret about, from slowing earnings growth to fears of declining profit margins, but you can't rule out those less-tangible market-turn moments either. Here are a few signs that maybe, just maybe, the stock market has topped out:
1. Apple hubris
Analysts are giving investors flashbacks to the late 1990s with their aggressive price targets on Apple Inc. This week, two analysts entered four-digit territory, one with a target of $1,000 (U.S.) on the stock, the other going a little further with a cutesy target of $1,001.
The new targets imply that Apple will soon have a market capitalization of about $1-trillion. They also imply that Apple's current share price only reflects about 60 per cent of the company's true value – suggesting that the maker of the iPhone and iPad is really an unloved, undiscovered stock at this point.
True enough, Apple is just one stock. But is it a symptom of overconfidence?
2. Optimism is everywhere
The stock market made its most impressive gains when it was emerging from the ashes of the financial crisis and investors bet that the world would recover – one day. Amid gloomy employment reports and the Federal Reserve resorting to experimental monetary policy to keep the economy alive, the S&P 500 surged more than 100 per cent from March 2009 to April 2011.
Since then, the economic news has improved immensely, highlighted by the U.S. unemployment rate retreating to 8.3 per cent. Even the Fed is on board, sounding a little more upbeat about the economy in recent monetary policy reports. Yet, over the past year, the S&P 500 has risen just 2.4 per cent overall. Perhaps the good news has already been baked into stock prices.
3. The VIX fell asleep
Everyone's favourite fear gauge, the CBOE volatility index recently slumped to a five-year low, suggesting that investors saw nothing but clear skies, laughing children and nuzzling bunnies ahead.
Yet, the VIX does a better job of reflecting the current environment than it does in forecasting the future. It spiked to a high of 80 following the collapse of Lehman Brothers, in 2008 – and was in a dozy state in 2007, before the crisis began. For some curmudgeonly investors, today's low level simply means that investors have become too complacent.
David Berman