A Complacent & Dangerous Market

“Things got worse and worse. Finally, there came the awful day of reckoning for the bulls and the optimists and the wishful thinkers and those vast hordes that, dreading the pain of a small loss at the beginning, were now about to suffer total amputation without anesthetics. A day I shall never forget, October 24, 1907.” — Reminiscences of a Stock Operator

I’ve been thinking about the above quote quite often over the past few weeks. Over the past six years, traders have been conditioned to believe that the market always comes back. Look at the COVID decline, the 2025 Tariff Tantrum, and the April 2026 low. All were V-shaped recoveries. Those who managed risk and used stops seemed foolish. After all, buying and holding, averaging down, and diamond hands work until they don’t. And when they don’t, those traders who refused to manage risk suffer immensely.

The market was acting quite abnormally last month (see post), and I noted in mid-October that this was a time for defense (see post). Now, we are starting to see distribution pile up on the QQQ, and the S&P 500 looks like it is forming a head-and-shoulders top on the weekly chart.

With growth stocks decimated and the indexes starting to show signs of distribution, you’d think there would be fear in the market. Instead, the VIX is only around 20, which indicates to me that this is a complacent market.

A complacent market, where traders have been conditioned to buy the dip, is extremely dangerous. When they finally come to their senses, there could be sharp and rapid selling. The sentiment graph below shows the various stages of the market, and I believe complacency best sums up where we are today.

Cash is the wisest position here. Remember, it’s always better to raise cash and step aside than to argue with the market. It’s not about being stubborn or being right. It’s about living to trade another day.

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