Stock Indexes Nibble At 2012 Highs, VIX Plumbs New Lows

U.S. stock indexes stop just below 2012 highs and post six weeks of gains

On Friday, August 17th, the S&P 500 (NYSEARCA:SPY) closed within 1 point of its 2012 closing high and the Dow Jones Industrial Average (NYSEARCA:DIA) finished 4.12 points below its May 1, 2012 closing high. Volume and volatility remain at extreme lows as the dog days of summer continue. This week’s action marked the sixth week in a row of positive finishes for both the Dow Jones Industrial Average (NYSEARCA:DIA) and the S&P 500 (NYSEARCA:SPY)

Consumer sentiment rose in August and July leading indicators advanced 0.4%, beating expectations and improving on last month’s negative reading of -0.4%.

The Nasdaq 100 (NYSEARCA:QQQ) gained 0.44% and the Russell 2000 Index (NYSEARCA:IWM) added 0.83%.

Markets continued to be buoyed by hope for a resolution in the European debt crisis and more central banker support from the Federal Reserve and European Central Bank.

Volume was again far below average as market participants take vacations and sit on the sidelines waiting to hear from Fed Chairman Ben Bernanke who is scheduled to speak at Jackson Hole on August 31st.

VIX, the CBOE Volatility Index, also known as the “fear index,” dropped again today to close at 13.45, its lowest level since 2007. The VIX indicates little fear and high complacency in the markets and there’s an ongoing argument over whether or not this is a portent of higher volatility and lower stock prices ahead. VIX has historically seen lower levels and can stay at low levels for a long time. However, levels below 15 have often been floors from which volatility spikes and stock prices decline.

Looking ahead to the end of the dog days of summer, global markets face the possibility of more turmoil in Europe, a potential Greek exit from the European Union, the Presidential election and fiscal cliff in the United States and a slowing global economy, all of which could insert more uncertainty and fear into today’s calm situation.

But for now, screens are green as stocks and ETFs march higher and volatility declines.

Popular VIX ETNs include iPath S&P 500 Short Term Futures ETN (NYSEARCA:VXX) down 2.7% for the day and nearly 70% from its yearly high, and VelocityShares Daily 2X VIX ETN, (NYSEARCA:TVIX) down 4.2% for the day and more than 90% from its 2012 high.

VelocityShares Daily Inverse VIX ETN (NYSEARCA:XIV) which is designed to move opposite to VIX futures, gained 2.9% for the day and is up approximately 70% from its early June lows.

Bottom line: Complacency rules as global stock markets advance on thin volume and hopes for more monetary easing from the Federal Reserve and European Central Bank. Major indexes now sit just below the last remaining near term significant resistance levels and are overbought. A pause here could be expected followed by a pitched battle between the bulls and bears over current resistance levels.

Disclosure: Wall Street Sector Selector holds a positions in (XIV) and actively trades a wide range of exchange traded funds. Positions can change at any time.