Ben Laidler, global markets strategist at the eToro trading and investment platform. Laidler notes that “investor sentiment has seen a sharp rise over the past six weeks” and is at near two-year highs. This is “the first sign of fear of missing out on the part of investors (FOMO), since the rise in the indicator is due to large inflows of funds that chase returns,” he points out.
FOMO returns to the markets
MARKET:
Investor sentiment has seen a sharp rise over the past six weeks, according to our indicator. It is now at the highest levels in almost two years (see chart) and on intermittent yellow alert.
This is the first sign of fear of missing out on the part of investors (FOMO, Fear Of Missing Out), since the rise in the indicator is due to large inflows of funds chasing returns. The two pillars of the bull market will be tested this quarter, as Q1 earnings begin on April 12 and June sees the first interest rate cuts from the ECB and the Federal Reserve.
The markets deserve a break or a 5% pullback, and this wave of confidence reinforces our conviction. But with solid fundamentals and liquidity on the sidelines, there is no need to fear it.
FEELING:
The rally in the sentiment index has been driven by the rebound in ETF flows, with significant inflows for four consecutive weeks, focused on US large caps. It doesn't surprise us. With the large amounts of cash on the sidelines and the fundamentals driven rally we have seen since November.
VIX volatility has also fallen back toward all-time lows, and AAII retail investor sentiment is near its most bullish levels of the year. Only the ratio between put and call options remains close to the average.
This rally in the sentiment indicator is a contrary sign that lower yields are coming, but not marked weakness. Historically it works better to signal bullish markets than bearish ones.
INDICATOR:
Our proprietary eToro Investor Sentiment Indicator tracks the VIX, fund flows, retail investor sentiment, and put/call ratio.
A low number is a contrarian bullish signal, as there are more investors left to return positive to the market, while a high number is a contrarian cautionary signal, as investors are already bullish. It is usually a better signal to buy than to sell. It is specifically made up of
1) Flows from equity investment funds and exchange-traded funds (ETF).
2) The long-running American Association of Individual Investors (AAII) sentiment survey.
3) The VIX index of expected volatility of the S&P 500 in 30 days.
4) S&P 500 put/call ratio, proportion of put purchases (sell option) versus calls (purchase option).
Source: Territorioblockchain.com
