“Be fearful when others are greedy and greedy when others are fearful”
It’s one of Warren Buffett’s most famous quotes and encapsulates the two driving emotions of investors at any one time. It’s the ethos that has made the Oracle of Omaha one of the greatest investors ever and follows the most important rule of investing: “buy low, sell high.” The Berkshire (NYSE:BRK.B) CEO’s words have inspired the creation of CNN’s Fear & Greed Index, which has recently just ticked over into greed territory.
What is the Fear & Greed Index?
The Fear & Greed Index is a tool created by CNN to gauge what emotion is driving the market. It uses seven criteria to come to this conclusion, including the ratio of put-to-call options, the VIX, and the demand for safe havens like treasury bonds. For a full run-down of the indicators and how they’re calculated, check out this link.
Just a quick glance at the index shows that put buying levels amongst traders, in comparison to calls and bonds’ relative performance to stocks, are at some of the lowest levels in the past two years. When you find yourself repeatedly asking “why is the market still going up?”, here’s a good place to look for an answer.
CNN states: “Too much fear can sink stocks well below where they should be. When investors get greedy, they can bid up stock prices way too far”, letting us know that once the index weighs too heavily in one direction, a subsequent reaction is sure to follow. So why is it indexing greed right now?
The rise of the retail investor
Many of you may have already seen this incredible chart produced by Goldman Sachs (NYSE:GS). As the institutional money fled for the hills, retail investors poured in to pick up the pieces and came away with some huge returns. March’s sell-off was market-wide and there were few, if any, securities that didn’t see a significant dip, but some of the recoveries since those lows have been remarkable:
- Zillow (NASDAQ:Z) is up 148%
- Square (NYSE:SQ) is up 141%
- Slack (NYSE:WORK) is up 134%
- Mercado Libre (NASDAQ:MELI) is up 90%
- Nvidia (NASDAQ:NVDA) is up 79%
Just look at our returns versus that of the S&P 500! Click here to find out how we continue to beat the market and view the list of stocks we think will turn out to be the next Amazon, Tesla, or Netflix!
A combination of stimulus cheques, commission-free trading, more spare time thanks to stay-at-home orders, and a wounded market made for a perfect storm for retail investors and they’ve taken full advantage. This was a generational buying opportunity. However, what we’ve seen since is a sense of FOMO investing and a buy-the-dip mentality which has led to one of the most overpriced markets since the dot-com bubble. Perhaps the most blatant example of reckless investing I’ve seen is almost 60,000 Robinhood accounts buying Hertz (NYSE:HTZ) as it approached and then filed for bankruptcy in the hopes of finding a bargain.
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With a soaring rally, spearheaded by recovering growth stocks and the omnipotent big tech giants of Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOG), the Nasdaq index (NASDAQ:QQQ) is approaching new all-time highs in the face of dire economic circumstances. While the stock market is not a representation of the economy, a divergence of this magnitude, in my eyes, is not sustainable in the long run.
If I knew where this goes next, I’d be getting paid a lot more money, but I have a feeling the next 50 days may not be as peachy as the last.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.