What's Next For The US Stock Exchanges?

In recent months, the US Stock Market provided real mood swings. It is worth to briefly recall what has actually happened.

In the beginning of October, US shares has finally began to react to what is really going on in the world. Persistent rally on the American Stock Exchanges had to finally stop (at least for a while) considering that, the other continents have been experiencing declines on their exchanges. From October 1st to December 25th, main stock indices in the US has lost about 20% of its value. President Donald Trump has decided then to organize a quick meeting with the Plunge Protection Team which is a team of big banks responsible for fighting against panic sell off's on the market. It is worth recalling that we have been dealing with extreme pessimism among investors at that time.

Moreover, President of the United States said that "I think it's a tremendous opportunity to buy". Who took these words seriously has made a lot of money. From December 26, the shares prices have significantly increased which has been led by the small companies - the Russell 2000 index has increased by 27% within 2 months.

Interestingly, recent weeks have been also very good for gold, oil, and bonds. The US Dollar has strengthened as well. This unusual situation last week led the Daily Sentiment Index (DSI) to the exceptional levels (DSI is the index gauging investors' moods against certain assets: 0 - extreme pessimism, 100 - euphoria):

Bonds = 78%

Shares = 88%

Gold = 90%

Oil = 91%

These data is as of three trading sessions ago. The first important issue is the fact that the optimism has been very high for all four assets. The last time we have faced such a situation in October 2007, at the beginning of the financial crisis.

The second important aspect is the fact that the Daily Sentiment Index is based on the moods of small speculators, who most often are wrong during the market's turn arounds (this is a quote from the DSI index description).

Where are we today? The optimism somewhat has weakened a bit, but remains on very high levels:

Bonds = 62%

Shares = 82%

Gold = 55%

Oil = 78%

On the one hand, the above data suggest that we need to be cautious, but also could someone say "wait, recently you have written that the rise in prices is mainly due to the buybacks..."

Unfortunately, the market reality is not black and white. We are always dealing with factors that have a greater or smaller impact on prices. Liquidity, whether in the form of a currency printing or buybacks is crucial, but do not forget that investor's moods are also significant. That is why it is worth looking at this closely and determine to what extent they have influenced on the last shares rally. This is important because if we come to the conclusion that investors are now fully involved in equities, this would mean that further increases will depend only on buybacks, PPT, and central banks interventions.

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