Benzinga - by Piero Cingari, Benzinga Staff Writer.
The current euphoria on Wall Street, characterized by a seemingly unstoppable bull run, has raised eyebrows among seasoned market observers, including Ed Yardeni.
Yardeni, who has consistently maintained a positive outlook on the stock market over the past year, has recently expressed some nervousness as he observes the bulls’ unchecked advance on Wall Street.
“Today, there are lots of happy bulls, including us. We would be happier if there were fewer bulls,” Yardeni wrote in a recent post.
The Nasdaq 100 Index, as tracked by the Invesco QQQ Trust (NASDAQ:QQQ), is up by 28% since late October 2023, marking fifteen out of seventeen weeks in the green.
The S&P 500’s top performing stock – Nvidia Corp. (NASDAQ:NVDA) – has risen by over 60% in the first two months of the year, on top of the 240% growth witnessed during 2023.
Excessive Optimism: A Double-Edged Sword Yardeni points to an overwhelming optimism fueling the U.S. stock market’s growth as a potential red flag. “We have nothing to fear but nothing to fear. The Fed is done tightening. The economy is doing fine. Inflation is moderating. The stock market is hitting record highs. So what’s wrong with this picture? Nothing, except that it mirrors the consensus view, which we also share,” he explains.
Unheeded Warnings From Contrarian Indicators Highlighting the risk of complacency, Yardeni references some key contrarian indicators that suggest bullish sentiment may have reached an unsustainable peak.
Notably, the Investors Intelligence Bull/Bear Ratio recently hit 3.54, marking a zenith since the bull market’s inception, before slightly receding to 3.45. Yardeni highlights that this ratio historically signals a more compelling buy opportunity when below 1.00, rather than serving as a sell signal above 3.50.
Similarly, the Bull/Bear Ratio measured by the American Association of Individual Investors points to widespread bullish optimism, as it hovers well above the threshold of 1.
Source: Yardeni Research
Furthermore, the Put/Call Ratio also indicates a prevailing disregard for risk, with put option purchases lagging significantly behind calls.
Yardeni noted that retail investors’ recent fervor for equity ETFs has disproportionately benefited the so-called MegaCap-8, underscoring a feedback loop that might herald a market “meltup.”
Yardeni concludes with a cautionary stance: “A minor correction in the S&P 500 is unlikely to dampen the bullish fervor. Should the market ascend further, in defiance of these contrarian sell signals, it could signify the onset of a meltup.”
While Wall Street’s bulls continue their jubilant charge, Yardeni’s analysis offers a sobering counterpoint, suggesting that too much of a good thing could indeed be worrisome.
Read now: American Express Hits All-Time High: Chart Points To Upcoming Bull Battle At Resistance Line
Image created using artificial intelligence with Midjourney.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.