Jared Dillian Says the Stock Market's Price Action Is Supernatural

NEW YORK ( Real Money) -- I don't have the spreadsheet skills to be able to back test stuff like this, but that has to be the fastest the VIX has ever gone from 30 to 12 in history; 30 is generally considered to be low-level panic, and 12 is considered to be elevator music.

People were wetting their pants three weeks ago. These exact same people are saying "bull market, dude" today, like this whole correction never even happened.

What is going on?

A few things. The first is that, during the correction, there was a concerted effort by retail and professional investors alike to short volatility. It's a risky trade, but people have been conditioned to do it because selling volatility in a crisis is often easier and less scary than buying stocks is. You can look at the assets under management of the short-volatility funds, such as the VelocityShares Daily Inverse VIX ST ETN (XIV) . They exploded.

This is kind of hilarious, because owning volatility is supposed to be the hedge for long stocks. So if people are shorting volality in a crisis, it is the ultimate Texas hedge. There's nothing like being 100% long and then short your hedge for good measure. If this isn't a sign of speculative excess, I don't know what is.

Also, I did some research, and of any correction of this magnitude (9% or more) in the last 30 years; this is the only one that was a V-bottom. Put another way, V-bottoms generally don't exist when the market has to absorb large losses. It's an anomaly, and the primary reason I didn't cover my short.

St. Louis Federal Reserve President James Bullard did give the market a shove when he leaked the possibility of a fourth round of quantitative easing, but he changed his mind 150 handles later, and so I think any debate about whether the Fed cares about the stock market should be settled by now.

I am going to sound like a cranky bear here, but as I look around at various indicators -- take the American Association of Individual Investors (AAII) sentiment survey, for example -- we are seeing dangerous levels of complacency.

We believe we have eliminated the business cycle. We believe we have eliminated corrections! We've had 1,100 days without a correction.

Folks, perhaps some of you have been doing this longer than I have, but this kind of price action is not normal. It's supernatural.

Well, there isn't any sense complaining about it. You take when you can get. But I don't think I'm ready to bail on being slightly short.

Of course, there is a good chance things will be pretty quiet between Veterans Day and Thanksgiving, and then you usually get a year-end rally, but you never know. Warren Buffett says to buy when there is blood in the streets. I don't think there's blood in the streets right now. In fact, I think the opposite is true.

This is not exactly the time to be putting new money to work. Disagree with me about being short? Reasonable people can disagree on that. But look at Coke (KO) . It is literally a zero-growth company with a 23x price-to-earnings ratio. How do you explain that?

(Editors note: This article was originally published on Real Money Nov. 11 at 10 a.m. EST.)

At the time of publication, Dillian was long two-month at-the-money puts on the S&P 500.

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