Don’t buy into this ‘complacent’ rally, strategists warn

Where did all the volatility go?

Despite a slew of quarterly earnings misses, the most popular measure of expected volatility in the S&P 500, the CBOE Volatility Index, has remained notably tranquil.

"[Investors] think they've really got the world figured out," Nick Colas of Convergex said Friday on CNBC's "Trading Nation."

According to Colas, investors are at ease believing that the Federal Reserve will not raise interest rates anytime soon, therefore pushing aside the possibility that a recession could be on the horizon.

Since mid-March the S&P 500 has risen nearly 4 percent, while the VIX has bounced around within a five-point range in the same time frame — and is more than 50 percent off its highs from February, when the market took a nosedive.

This apparent complacency in the market, Colas says, is simply a byproduct of low interest rates.

"When you have trouble holding even 2 percent on the 10-year Treasury, logically valuations would be higher, because the discount rate is lower, so it is consistent there," Colas said, referring to the negative correlations between interest rates and valuations, as well as between the VIX and stock prices.

"We're all tied up in this package where you have to believe in your heart of hearts that rates stay very low for a very long time," he said. "For the moment, the market feels like it believes this narrative very strongly and is comfortable with it."

But not all traders think a temperate market will last.

The S&P 500 is trading historically "extremely high" levels of 11x EBITDA, "a very high valuation relative to the actual earnings power in the market," Larry McDonald of ACG Analytics said Friday on CNBC's "Trading Nation."

McDonald suggests waiting for another decent pullback in the market before jumping in at these valuation levels.

"Put money to work into fear," he said. "Don't chase complacency."

Futures traders don't appear to think the low volatility will last, either. While the VIX opened Monday trading at 14, September VIX futures traded at 20, which would imply a much more volatile market environment.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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