Fear, Greed, and Bad Breadth

The only thing we have to fear is fear itself -- or an utterly range-bound market. We've pretty much established the SPDR S&P 500 ETF (SPY) is never moving above 213 or below 205 ever again. Yet, the Fear is still there.  Here's how CNN's Fear and Greed Index looked yesterday morning:

There are some oddities with this. To start, our own local Fear Index, the CBOE Volatility Index (VIX), is flashing a big fat nothing. In fact, I'd call it close to complacency, though on the CNN scale it's "Neutral." Their put/call number says "Neutral" as well.

What's more, the market itself isn't doing much of anything particularly scary. The Nasdaq Composite (COMP) just hit new highs. Apple Inc. (NASDAQ:AAPL) in and of itself might have knocked us for a loop just because it's so large, but that panic fizzled before it even really started.

Yet we're bordering on Extreme Fear, and we're getting more so this week. From CNN:

So what's knocking us down? Well, let's see… There's junk bond demand. The yield premium 205 bps as per CNN, which they say is on the high end of the last couple of years. It's also diverged from VIX in a noteworthy way, per Bloomberg. 

There's also some breadth measures, and those are starting to get some ink lately. According to CNN: 

"The McClellan Volume Summation Index measures advancing and declining volume on the NYSE. During the last month, approximately 6.25% more of each day's volume has traded in declining issues than in advancing issues, pushing this indicator towards the lower end of its range for the last two years."

And: 

"The number of stocks hitting 52-week lows exceeds the number hitting highs and is at the lower end of its range, indicating extreme fear." 

The "generals" do remain quite strong, but the army keeps lagging. Should we worry?

Well, to some extent, yes. It's never good to see a narrow rally. But on the other hand, the last time these measures looked so weak was October of last year. I believe our worries then were cascading oil prices and future Fed rate hikes. It's kind of similar to now, except that the market overall was doing poorly, whereas now we're flatlining. And last time turned into a pretty good buying opportunity.

Will history repeat itself? It's a sample size of 1, so I wouldn't bet the ranch on it, I'd just say that pesky bad breadth doesn't have to stay a permanent condition. 

On the other hand, that junk bond divergence could prove worrisome. There's some thought that credit players now are the biggest users of VIX products as hedges, so that could all resolve with a move into the tradeable VIX complex.