Monday , 2 October 2023

Melt-up In Stocks Implies There’s Nothing To Fear – BUT the Fear Of Missing Out Itself

…Here in January of 2018, stocks have not pulled back 2% for five-plus months; they have notinvestor-fear corrected a mere 3% in 15 months or 5% in 19 months. It appears as though the fear of missing out on the uptrend has become so pronounced that buyers no longer wait for the most modest of pullbacks to acquire shares lower.

The original article by Gary Gordon has been edited here for length (…) and clarity ([ ]) by to provide a fast & easy read.

A look at the Relative Strength Index (RSI)

…The monthly RSI for the Dow Jones Industrials is higher than it has ever been in the past 100 years…yet peaks for monthly RSI values are associated with increased risks of near-term price reversals.

(Click on image to enlarge)


A look at the Average Directional Movement (ADX)

…[The] Average Directional Movement (ADX) captures the strength or weakness of a trend. Most analysts follow the heuristic that ADX readings (14-period) over 30 confirm strong uptrends. That’s a good thing. After all, the “trend is your friend.” However, an uptrend can jump the proverbial shark. For instance, extreme ADX readings of 56 preceded the stock market crash of 1987 as well as the financial collapse of 2008. Historic extremes in terms of trend strength, then, often precede disaster.


… The current ADX reading of 70 has rocked the record books. The current uptrend’s strength is, for better or worse, incomparable. Keep in mind, however, when one couples severely overbought levels (e.g., RSI, ADX, etc.) with the knowledge that stock market overvaluation is also pushing on a string, …a sharp spike in volatility might be preordained. 

A look at the S&P 500 Price-to-Sales (PS) Ratio


A look at the Rydex Bull-Bear asset ratio

As if overbought, overvalued conditions were not enough to ponder, the Rydex Bull-Bear asset ratio has eclipsed even the most bullish extremes. Bullish assets currently outstrip bearish assets by a factor of 20. Imperfect sentiment indicator notwithstanding, the discovery is downright mind-boggling.


A look at the Stock-Bond Ratio


Not to fret, though. The melt-up in stocks implies that there is nothing to fear but fear of missing out (FOMO) itself.

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