Despite the record gains in the stock market recently, evidence is mounting that the market could be heading for a downward slide.
Wall Street-types call it a Black Swan, which according to Wikipedia, "is a metaphor that describes an event that comes as a surprise, has major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight."
World events over the past months have definitely fueled the fear, with unrest again in both Iraq and Afghanistan, the downing of Malaysian Air Flight 17, sanctions on Libya, sanctions on Russia, and fighting again in Gaza.
But, the market has hit record highs right? How can things go bad now? The S&P 500 SKEW index measures how aggressively investors are buying protection against downturns. In essence, how scared is the market.
The SKEW rose sharply over the last few weeks and the Volatility Index (VIX), which measures market fear spiked last week but recovered following the downing of MH 17. The gap between the two actually hit an all-time high shortly before the Independence Day holiday, which suggests investors are growing more fearful of a Black Swan.
This fear is currently being offset by a growing perception internationally that the U.S. is a safe haven for their money and more foreign investors are putting their money into the U.S. market. Their motivation is that same, international turmoil is making the U.S. look more and more attractive.
But, there is a light at the end of the tunnel. If more and more investors are fearful of a Black Swan, they start to plan for the worst. They take less risk, and expose themselves to less volatility. This has an effect of staving off an actual Black Swan, which usually is caused by reckless financial activity.