How close to Euphoria are we?

Summary:

  • Sentiment seems to be extremely bullish. But when everyone is already bullish, who is left to buy?
  • IPO index suggests that euphoria is creeping into portions of the stock market.
  • We may be hearing echoes of the 2000 TMT bubble and bust
  • In contrast, the commodity cycle looks finally to have broken out of its long-term bear trend

Is Extreme Greed and IPO mania a warning sign?

While the Santa rally suggests that the year-end should be bullish for stocks, I am becoming increasingly concerned by the pervasive optimism everywhere concerning stocks.

One illustration of this bullish consensus can be seen in the AAII sentiment survey of American individual investors. The chart below measures the difference between the number of bullish and bearish investors, and has historically been a good contrarian indicator.

That is to say, a high net bullish reading (as we have today) suggests that the stock market could be due a correction, as we saw at the beginning of 2018, for example.

AAII Bull-Bear sentiment spread shows extreme bullishness

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Source: ycharts.com

Another sign of the froth in stock markets is the huge performance of the IPO ETF, which measures the performance of new entrants to the US stock market.

IPO ETF has gained over 100% this year

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Source: tradingview.com

It is likely that this IPO mania is being powered largely by US retail investors, who tend to be very momentum driven and generally buy at the top, and sell at the bottom…

Echoes of 2000?

Those of you who have been investing for over 20 years might see the parallels between today’s situation and the 1999-2000 Tech-Media-Telecom (TMT) bubble and subsequent bust.

The mega-cap tech momentum around the FANG stocks (Facebook, Apple, Amazon etc.) continues unabated, with the NYSE FANG+ index hitting yet new highs for the year.

US FANG group of tech stocks surges to new highs

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Source: tradingview.com

Back 20 years ago, the Nasdaq Composite index more than tripled from its late 1998 low to its peak of over 5000 in March 2000, before then imploding in spectacular fashion as the over-investment in areas such as fibre optic cables did not find sufficient demand.

Nasdaq composite index soared to 2000, but then suffered…

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