Would you be greedy when others are fearful?
On Tuesday, the U.S. inflation data reported ran hotter than forecasts in August, which solidified traders' bets on a 75 basis-point rate hike by the Federal Reserve next week. The stock market was scared on the terrible CPI data.
The last few months have seen a wild journey for global stocks, with rallies spurred by low market positioning and expectations over peaked U.S. inflation, and declines driven by worries that central banks will remain hawkish for longer and send the U.S. into a recession. The market sentiment is always swinging.
Buffett once said that (be) "fearful when others are greedy and greedy when others are fearful." So how could we gauge the market sentiment?
Fear & Greed Index
The CNN Money Fear and Greed index showed a decrease in investor sentiment after US stocks recorded gains at the start of the week.
At a current reading of 42.0, the index fell in the "FEAR" zone, following a previous reading of 49.0.
The Fear & Greed Index is a measure of the current market sentiment. The reasoning behind it is that extreme fear tends to lower stock values, whilst excessive greed tends to have the opposite effect. The index can be a useful technique to gauge market mood when used in conjunction with fundamentals and other analytical tools.
Seven separate indicators that each gauge a different facet of stock market behavior are combined to form the Fear & Greed Index.
They are demand for safe-haven assets, market volatility, stock price strength, stock price breadth, put and call options, junk bond demand, and market momentum. The index measures the difference between these separate indicators' average deviations and their usual divergence.
Each indication is given equal weighting in the index, which calculates a score from 0 to 100, with 100 denoting the highest levels of greed and 0 denoting the highest levels of fear.
Investors are fleeing equities
Recession-threatened investors are selling stocks in droves, with equity allocations at all-time lows and cash exposure at all-time highs, according to a survey by Bank of America Corp.
In the bank's global fund manager survey of 212 participants, 52% said they were underweight equities and 62% overweight cash. They had $616 billion in assets under management for the week ended Sept. 8.
The largest weekly outflow since June 15 was recorded by investors who withdrew a net $14.83 billion from U.S. equities funds, according to Refinitiv Lipper data.
Where are the market going?
Experts at prestigious institutions such as Deutsche Bank AG and JPMorgan Chase & Co. believe that gloomy market sentiment, which is frequently a contrarian indicator for a stock rise, would likely propel equities higher through the end of the year.
According to Bank of America's Hartnett, the S&P 500 will rise to 4,300 points, or about 5% above present levels, as a result of the severity of the downbeat sentiment and better-than-feared macroeconomic data. However, he believes that the index will drop back from that point and continues to be "fundamentally and patiently pessimistic."
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