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Dorn: Too Much Gloom And Doom

As a follow-up to our thesis from last week that investors and traders might be developing immunity to the daily onslaught of bad news, my colleague Dave Harder and I looked at three metrics for hints of where the markets might be headed over the near term.

Recent trends in short term US Treasury rates, the Volatility Index and the Baltic Dry Freight Index show that the prospects for credit markets, equity markets and the economy are improving.

1. In October and November, one month US T-Bills were yielding close to or below 0%. Further evidence of fear in the credit markets was a rise in the TED spread from one percent in the summer of 2007 to over four percent in October 2008. Last week, one month T-bill yields reached .25% while the TED spread moved back to a more normal rate of 1 percent in January. These are signs that the flight to safety trade may be reversing and credit conditions are improving.

2. The Volatility Index is half of what it was in October and November. The Volatility Index (VIX) is a barometer of investor fear and anxiety. It peaks when markets bottom and reaches lows at market peaks.

It peaked near 90 at the October low, reached 80 during the November low and now sits in the mid-forties. Although still close to an historical extreme, it is only half as high as it was in October. This indicates that the level of fear for equity investors has at least returned to the normal range--even if it is historically extreme.

3. Since December, global trade has begun to improve. The Baltic Dry Freight Index reflects the cost of ocean freight rates for raw products. This rate skyrocketed from 2000 in 2005 to peak at 12,000 last May before collapsing to 663 on December 5, 2008. After being flat for a while, the Index has started an uptrend and has now more doubled from the low to the 1700 level. This is a positive sign that the demand for manufactured goods may be increasing, albeit slowly.

Are we out of the woods yet and can the markets go lower? Yes, the markets can do whatever they want to do. However, market participants may soon realize that the glass is more full than empty.

That shift in sentiment could cause major moves in equities and commodities.

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Janice Dorn, M.D., Ph.D., is a financial psychiatrist and chief global risk strategist for Ingenieux Wealth Management in Sydney, Australia. She also offer trading consulting and coaching services via her Web site, TheTradingDoctor.com.