The Crowd Has Gone Wild
-- January 23, 2004

Speculation is running rampant on Wall Street. While we haven't heard many stories of doctors and lawyers giving up their practices to become day traders (like in 2000), we are seeing extreme levels of optimism in the markets.


* The VIX (CBOE Volatility Index) is at a seven-year low. The VIX measures options volatility. When volatility is low, it indicates that investors are complacent as they are not protecting their positions with options.

* The American Association of Individual Investors' Bullish and Bearish readings are at extreme levels. Nearly 70% of investors surveyed were bullish, while less than 10% were bearish. Those are similar readings to 2000, when the S&P; 500 was cut in half over the next two years.

* Volume on the OTC Bulletin Board has exploded nearly 200% in the past year. The OTCBB is where low-priced stocks that don't qualify for one of the major stock markets trade. It more closely resembles a casino than a stock market. Bulletin Board volume also spiked during the Internet bubble.

* Investors have returned to margin. When investors want to take on more risk than their accounts can handle, they go out and borrow the money. That can be a very dangerous strategy should the markets reverse. However, speculators apparently aren't concerned with that at the moment.

These are just a few examples of the kind of confidence investors are feeling at the moment. Unfortunately, the markets usually behave in a way that hurts the most people at once -- typically when investors are full of optimism and believe they can't lose money.

related article:
Margin Debt Snaps Back