This Signal Just Flashed for the First Time in 8 Years; History Says It Could Indicate a Sharp Correction Ahead

While semipermanent marketplace returns are based connected fundamentals, short-term returns tin beryllium heavy driven by sentiment and momentum. If investors are feeling good, they tin assistance thrust up equity valuations and ignite a lengthy banal marketplace rally.

The artificial quality (AI) roar has helped present 3 consecutive years of double-digit returns for U.S. stocks. That's not lone boosted marketplace sentiment significantly, it's besides pushed it to levels seldom seen successful history.

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Bank of America precocious released its latest planetary money manager survey, which includes the fashionable Bull & Bear Indicator. The report's findings amusement that indicator hitting 9.4 successful January, considered "hyper-bull" territory, and marking the highest level it's reached since January 2018.

The twelvemonth 2018 provides a classical illustration of however bullishness tin construe straight to definite trading behaviors that yet pain investors. In 2017, the S&P 500 (SNPINDEX: ^GSPC) roseate by astir 20% and continued to tack connected further gains successful aboriginal 2018. This was the clip astir which the Chicago Board Options Exchange Volatility Index, oregon VIX, was astatine historically debased levels, often tracking successful the precocious azygous digits for extended periods.

Investors began selling volatility-linked futures contracts, betting that the debased volatility situation would continue. It was a money-making commercialized arsenic agelong arsenic the VIX remained low. But soon, volatility would return.

In February 2018, "Volmaggedon" happened. Volatility abruptly spiked and sent the VIX to 50 successful a substance of a fewer trading days. The abbreviated volatility commercialized blew up and the S&P 500 fell 10%. Investor overconfidence led to a abrupt marketplace daze that resulted successful a swift and crisp correction successful banal prices. A historically precocious speechmaking successful the Bull & Bear Indicator preceded this lawsuit by specified weeks.

The indicator besides signaled oversold conditions successful February 2020. This, of course, was close earlier the COVID-19 pandemic began shutting down the U.S. system and the S&P 500 cratered by much than 30% by March.

The Bull & Bear Indicator besides flashed an overbought awesome aggregate times successful 2006 and 2007. This was besides a accepted overconfidence awesome arsenic radical believed location prices would proceed rising. This led to highly overleveraged conditions that yet blew up successful 2008, starring to a heavy recession, a clang successful the lodging market, and a diminution of much than 50% successful the S&P 500.