Euphoria In Markets With No End In Sight?

U.S. markets are in another speculative fervor. It’s possible that we are at beginning of the business cycle, but near the end of the speculative cycle because the Fed didn’t let markets fully crash in March. Investors don’t even fear a recession because all that happened this year was a quick crash and rebound. A recession wouldn’t end this speculation, not that we are near another one. The end will come when everyone is in the market and they realize the Fed can’t save their risky stocks with no sales.

It’s highly unlikely this fervor lasts several more years. It’s very common to see people on financial Twitter bragging about triple digit returns year to date. Obviously, there are always people who lie about returns, but in this case, 2020 was so great that they don’t need to lie. People really have made amazing gains.

Let’s look at some of the euphoric data points. The NAAIM exposure index is at 103.17 which means for 3 weeks the average fund has been leveraged long. Short sellers simply don’t exist. The CNN fear and greed index is at 85 which signals extreme greed. As you can see from the chart below, the 5 day average of the CBOE put to call ratio is at a 20 year low. The junk bond yield is at 4.45% which is a record low. Over 90% of S&P 500 stocks are above their 200 day moving average which is the highest since 2011. The CAPE ratio is in the low 30s.

Value vs Growth

There has been a shift. Value stocks have beaten growth in the past few weeks. However, the highly predicted crash in growth stocks hasn’t come. The Nasdaq 100 is at a record high. The market wants its cake which is the rally in value stocks and doesn’t want to eat its vegetables which is a crash in the hottest stocks of the year which include software, electric vehicles, and online retail. These hot stocks shake off bad company specific news, high valuations, and good vaccine news which imply a return to normalcy. Value stocks are becoming less cheap, but growth stocks are still in a bubble.

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