The stock market has returned to where it has been this year as the VIX has gone back to below its median. The VIX is back below 11 and the S&P 500 is near its all-time high. Looking at the interplay between stocks and bonds, the bond market has undergone a seismic shift while the stock market hasn’t changed course.

To be clear, I wouldn’t say that the one-day selloff last week counts as a change of course for stocks. The chart below shows the big shift in investors’ positioning in the 10-year treasury note. As you can see, the positioning in early 2017 was the shortest on record. This was one of the reasons I was bullish on bonds. With economic growth showing signs of weakness and everyone betting that Trump would boost the economy within months, I felt going long bonds was a no brainer.

As you can see, the positioning has switched to the longest since 2007. This is interesting because the rally hasn’t been that strong. If you look at the chart below, the rally from 2014 to 2016 was much stronger than the latest one, yet the shift in positioning wasn’t as severe. In showing the chart above, I’m not saying the long treasury trade is over. It’s simply not as obvious that you should be long treasuries. Future treasury prices will depend on the latest economic data and the wild card that is the unwind of central bank policy. The point I am making in showing the dramatic shift in how treasuries are traded is to show how speculative they have become. Treasuries have become instruments traders use to make capital gains and stocks have become stable income creating vehicles. This is a reversal from historical precedent.

The chart below shows the narrowing gap between the realized one-month volatility of stocks and bonds on a six-month rolling average. As you can see, the difference in volatility is the lowest since 2004. The minimal difference has encouraged volatility targeting funds to increase their allocation to stocks. The thinking is that if volatility is low and returns are high, buying stocks is a no-brainer. Buying stocks for the long term in 2004 was a terrible idea as the financial crisis wiped away gains 4 years later.

The chart below shows the increased allocation to stocks among risk parity portfolios. Most portfolios have increased their allocation to stocks on an aggregate basis; that’s how stocks have gotten to record highs. What’s important to understand from this chart is that these risk parity portfolios think low volatility implies low risk.

There’s a difference between the VIX and realized volatility. The VIX reflects the volatility in the current market and realized volatility reflects past trading. The realized volatility is historic fact on how the market performed. The recent past results of realized volatility don’t predict future volatility or future returns. The current volatility reflects the changes in the S&P 500 based off options trading. It doesn’t reflect the risk in the market. It is a terrible predictor of risk. Right before the selloff on Wednesday, the VIX had a streak of 16 days without closing above 11.

There is no measure of future risk which can predict how much assets will fluctuate in value. The only way to project future risk is to do in-depth analysis on the vehicle you’re trading. Valuations, fiscal policy, monetary policy, and the economy determine the future risk stocks face. It’s foolish for investors to pile into the stock market because they don’t see risk in the realized volatility or the VIX. Looking at the past and projecting that onto future expected results is an example of recency bias. Using the current price of the VIX to determine future risk is a shortcut some investors may be taking instead of doing proper risk analysis.

Investors who want to buy stocks will justify their bullishness anyway they can. It’s not prudent. Imprudence is a popular strategy at the end of bubbles. If investors buy stocks because they aren’t volatile, then they may sell when stocks start becoming more volatile. If that strategy becomes popular, fear of volatility may cause an unprecedented run for the exits during a recession. On the other hand, it squashes volatility in the near term because investors have a cult-like faith in the consistency of stocks. They don’t acknowledge risk and won’t sell because of weakening fundamentals.

The chart below shows this trend in trading volatility in a different manner. VIX Vega is the sensitivity of the VIX. If you go short VIX Vega, you’re speculating that the VIX will become less sensitive. The interesting part of this chart is that the short VIX Vega trade became more popular among speculators after the market fell last week and volatility spiked. This is consistent with the overall market’s action. Dip buyers came into the market quickly in ‘plunge protection team’ mode and prevented a further selloff. Selloffs have become more of a bullish catalyst for stocks than good earnings or economic reports. It will take an extreme event to stop the dip buyers from boosting stocks. The trend is powerfully strong. Even investors who have made a name for themselves by spotting bubbles, are long the stock market.

Conclusion

The seismic shift in traders going from short the 10-year treasury to long the 10-year treasury shows how the treasury market has become a home for speculators. Only speculators bought the negative yielding Japanese government bonds. It has become safer to buy stocks. Not only have stocks become less volatile, they also offer positive returns. The lack of volatility in the market is reflective of the investors who are buying in. Now more than ever, the market is controlled by investors who don’t care about how the economy is doing and the latest quarterly corporate earnings results. However, when there is a shift in the economy, those who do care about it will sell their stocks eventually leading the passive investors to collectively panic.