The CNN fear/greed index is pushing towards extreme greed after just a month ago being within fear territory. The bullish animal spirits have prevailed as we saw a softer tone from Chair Powell driving risk appetites, particularly in lower quality stocks, to very high levels.
From CNN, "The Fear & Greed Index is a compilation of seven different indicators that measure some aspect of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand."
VIX: The S&P 500 implied volatility index is showing that the market is not truly complacent, with it reading 18.85 and historical 20-day volatility at 16.07. Giving a reasonable premium to IV over RV. As the VIX has fallen, it's created more demand for equities, particularly during event volatility crush situations, like the post-FOMC decision reaction that we saw during Powell's speech.
HY spreads: High yield vs investment grade spreads continue to narrow as financial conditions ease, down to 4.31. A sign that the credit market has discounted the possibility of rising credit stress for lower quality borrowers. The question may be whether companies like Bed Bath & Beyond are isolated incidents of defaults, or whether that situation begins to spread and create more consternation in junk debt.
NYMO (inverted): The oscillator shows positive breadth, but it is not overbought. An encouraging sign to be sure if one is looking for additional upside. Right now buyer participation is relatively healthy and robust.
CBOE equity put/call: At levels that indicate bullish complacency given the high demand for calls over puts. This definitely shows a mood of optimism regarding short-term gains on stock prices. It also may begin to illustrate that we are approaching a level where caution is warranted.
NAAIM (inverted): Managed money is the most long that they've been since early 2022, during the first bear market rally. The current reading is 78.37, back in April it was 83.41. With that concentration of long positioning it does beg the question how much managed money is left to get long?
Rydex bear/bull: Most hedges and bearish bets have been flattened out. The fund ratio is reverting back to normalized levels.
Two measures, Investors Intelligence and AAII, show that we have navigated away from bearish extremes of sentiment during the beginning of 2023. This shows that investors are more likely to hold current positions and add additional long positioning based on their survey results improving.
As investors become more bullish it does beg the question how far this measure can go if indeed this is just another bear market rally, within the context of a more convincing technical backdrop.
Investors are taking off risk in some areas to start the year based on ETF flow activities, including the NASDAQ and Russell 1000 and 2000. Exposure is also shifting, but remains net positive for emerging markets. The value factor seems to be in favor in the US, but beta in higher demand in Europe.
The recent bullishness has certainly been powerful, and led to some rather extreme price moves, particularly in the lowest quality components of the market, like short squeeze-driven rallies of fundamentally broken companies. I don't believe that is the building block of a new bull market, particularly one that would start at nosebleed valuations in many sectors. But only time will tell what lays ahead.
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