FOMO, Musical Chairs or Soros?
FOMO aka Fear of Missing Out has been running high, pushing the S&P 500 today to reach into severely overbought territory, moving more than two standard deviations above its 50-day moving average. In the chart below the middle orange line represents the 50-day moving average, with the top and bottom orange lines two standard deviations from that moving average. The index’s relative strength indicator is nearing 70, the level typically considered extreme overbought.
Looking at the CNN Fear and Greed Index, we can see that Greed, or more likely FOMO, is ruling the day.
In fact, “Greed” is at a level not seen in over two years.
Looking at all the momentum indicators, it is likely that the market will take out the highs from last year, breaking out of the longer-term trend of lower lows and lowner highs, which would be very bullish.
Market breadth has strengthened as well, which is also a bullish indicator. The chart below shows the percent of stocks in the S&P 500 which are above their 50-day moving average. More stocks moving up is bullish when the overall index is moving up rather than having the index moving up based on a few mega-cap high fliers.
All this while revenue for the S&P 500 has been falling for five quarters and earnings for four, which means that investors are paying more for each dollar of earnings to push prices up. At the same time we are starting to see upward pressures on labor costs, which will harm margins (don’t forget that already falling top line revenue) along with some hints of inflation and oil, a major input to darn near everything, having doubled in price since the February lows. Global growth expectations continue to be revised downward and political instability is widespread from domestic, with the Clinton v Trump drama just getting started, to international from political crisis in South America to China flexing its military muscles to the upcoming Brexit vote.
Outside of FOMO, I think we are also seeing the impact of the central bank game of musical chairs wherein central banks remove more and more chairs from the room, courtesy of quantitative easing programs, while the number of players in the room is rising with more and more retirees desperately needing to generate some sort of return from their savings. Recently the European Central Bank started buying corporate bonds, because hey, driving sovereign bonds into negative territory just wasn’t enough fun. That means those corporate bonds (chairs) with their nice yield (cushions) have been pulled from the room so there are fewer and fewer places to put asse(t)s.
But what’s that phrase?
Don’t fight the Fed!
Fair enough and it can and probably should be extended towards most all major central banks.
Then comes along a fellow named George. You might recall that ‘ole George (Soros to be exact) had a little kerfuffle a few decades back involving a central bank, (Bank of England). He’s one guy that did fight… and won. In today’s market George is once again making a bet against the central banks’ desire to keep asset prices up. He’s sold stocks and buying gold and gold miners. When the guy who fought a central bank and won goes for gold and dumps stocks, it just might be worth a few moments’ consideration.
In the interim, looking at all the data I can wrap my noggin’ around, it looks to me like stocks are more likely to keep moving higher for at the least near term. How near? Now that is the question and what keeps me up at night. This is a market that must be watched closely and looks to me an awful lot like a house of cards, but that house can be built higher. Just know if you want to play the game, that this is what you are standing on.
