It’s hard to get through a second quarter shareholder letter from investment pros these days without a mention somewhere within the first two paragraphs of “investor complacency” being of utmost concern at this juncture. This is usually followed by some version of this chart showing the CBOE Volatility Index on a deep dive in 2014:

VIX data by YCharts

The last time the fear index was this low was just as stocks were putting in their all-time highs in 2007:

VIX data by YCharts

That’s not to suggest we’re at a market top, or that the next leg down will be anything like ’08-09. Fundamentals and macroeconomics certainly don’t suggest the latter. But we’re now in month 33 since the last time the S&P 500 had a loss in the -10% to -20% range; according to InvesTech Research, corrections tend to occur, on average, every 26 months. So we’re on the long side here.

And then there’s this next chart. Complacency is a byproduct of a world where it’s been hard to lose money for more than a few months.

SPY Total Return Price data by YCharts

Even with the taper tantrum sell off in emerging markets in the middle of 2013, it’s not like the pain was deep, or the market low a drawn-out affair.

Now to be clear, the investment pros raising the complacency yellow flag are commenting on the general market atmosphere, implying that their own portfolios have been carefully combed to remove any undue level of exposure to overextended parts of the market. Et tu?

Taking profits in small caps and rotating into under-loved large caps is well worth considering. YCharts has twice in recent weeks spotlighted mega-cap stocks as a pocket of valuation sanity.

From early March to mid May small cap growth stocks, as seen in this chart of the Vanguard Russell 2000 Growth ETF (VTWG) did experience a bona fide correction, with a slide of nearly 12%, more than double the loss for the Vanguard Russell 2000 Value Index (VTWV).

VTWO Total Return Price data by YCharts

In a world where the markets are climbing a wall of complacency if not worry, those losses were pretty much recouped by early July, before beginning to slide again over the past few weeks. That’s a nice reprieve, but to be clear, there is little fundamental reasoning to support an ongoing overweight to small caps. The Vanguard Russell 2000 Growth Index ETF currently trades at 24x forward earnings estimates, and it’s not as if the value segment is a screaming deal. The Vanguard Russell 2000 Value Index ETF is at a forward PE ratio of more than 18.

Moreover, according to the Leuthold Group, the median PE ratio for small cap stocks (using trailing operating earnings) is at a 23% premium to large cap stocks. The norm since 1983 is just a 3% premium.

Another pocket worth reexamining is the liquidity within your bond holdings. The massive inflows into junk bond and bank loan funds and ETFs during the recovery likely will exacerbate the carnage at the next sell off. The SPDR Barclays High Yield ETF (JNK) and the PowerShares Senior Loan ETF (BKLN) have no doubt lured plenty of yield chasers into dangerous complacency. Over the past three years you could pocket yields of 4% to 6% or so and enjoy chunky total returns without any big sell offs:

JNK Total Return Price data by YCharts

But when the music ends -- and to be clear it may not be for a while as there is little to suggest recession -- the exit doors will be rushed as those yield chasers who’ve enjoyed a free ride get a whiff of what happens in times of economic duress. The bank loan ETF wasn’t around during the financial crisis, but here’s how the SPDR High Yield ETF fared:

JNK Total Return Price data by YCharts

Granted the 2008/2009 meltdown was (hopefully) an outlier, but back in 2001/2002 there was indeed pain to be had:

US High Yield Master II Total Return Index Value data by YCharts

Heading into that more “normal” recession, that junk index had a yield of more than 13%, providing plenty of income cushion when prices took a dive. Today the same index yields just 5.5%. Only the complacent would consider that a good return for assumed risk.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.