The S&P is almost at 2000, while the VIX reaches single digits.

Even Though Risk Is At A Record Low, Stock Markets Could Be In Trouble

Photo courtesy of Rafael Matsunaga via Wikipedia.

The stock market is rising while volatility is reaching new lows – here’s why that could actually spell trouble.

A low volatility index matched with high stock volume could mean trouble.

1. The S&P 500 is almost at 2,000 points, a historic milestone

The S&P 500 could top 2,000 points for the first time ever.

Image courtesy of Yahoo! Finance.

The S&P 500, which measures the performance of 500 top public companies in the U.S., has more than recovered since its precipitous drop during the financial crisis.

For the first time ever, it’s could break 2,000, more than 500 points above its pre-crisis 2007 peak of 1530.

2. Meanwhile, the low Volatility Index is reaching single digits

The VIX volatility index is reaching single digits.

Image courtesy of Yahoo! Finance.

The VIX measures market volatility, meaning the uncertainty of change in the price of a stock.

Greater volatility means a greater range of potential price changes. This means that the stock in question can rise or fall dramatically in a short period of time.

The number is based on the price of stock options investors buy to insure themselves from dramatic losses.

This low volatility index shows that investors see little in the future that will derail the current market rally.

The long-term average of the VIX is around 20, a number it has currently stayed under for more than a year, and could mean the market is due for a correction.

3. Could there be trouble on the horizon?

The last time there was such a low volatility index was when it hit 9.89 in 2007 – right before the financial crisis.

According to Stephen Sedgwick of CNBC, part of why the VIX is low is because investors are struggling to make money in a crowded market, and don’t want to pay the premium for the loss insurance of options.

The result is that one of the main indicators for stock market is lower than it perhaps should be – an “eerie” quiet as one analyst described it.

Earnings per share ratios are also reaching the highest level since 2010, meaning that stocks are expensive relative to the companies’ earnings.

Finally, corporate buybacks of their own stocks topped 2007 levels in the last quarter and look set to rise:

Corporate buybacks are at a 7-year high.

Image courtesy of CapitalIQ via ZeroHedge.

These buybacks, often made at prices not profitable for regular investors, is fueling the rally on the stock market.

It could also mean that investors aren’t properly pricing in risk that could result from a drop in such buybacks.

Of course, a low volatility index doesn’t necessarily mean investors have lost all fear of what lies ahead.

But it shows that markets are still behaving strangely as the Fed tapers down its unprecedented, multi-billion-dollar quantitative easing program.

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Ole Skaar