Investors usually approach the markets with two mindsets: fear or greed. This ends up driving most, if not all, of their investment decisions. Get this wrong, and the game is over before it begins.
Right now, you might think we’re in a massively fear-driven market environment.
I don’t blame you. Every day, we see headlines about rising interest rates, unmanageable inflation, and a looming recession…
But the truth may surprise you.
One of my favorite trading indicators is the CNN Fear & Greed Index.
It measures investor sentiment. And it ranges from Extreme Fear to Extreme Greed on a 0-100 scale.
The inputs are a clever mix of options prices that reliably tell the story of how scared everyone is. I’ll explain what they are below. But here’s the important part…
Right now, the indicator is signaling a major problem – and most people aren’t even aware.
Ignoring this flashing signal could derail your retirement by years.
At Intelligent Income Daily, we work around the clock to find the best income investments in the world for our readers. Understanding the broader economy – and market valuation – is a key piece of solving that puzzle.
Today, I’ll tell you what the indicator is saying… and how you can position yourself now to get ahead of the financial threats we see on the horizon.
Reality Vs. Perception
The Fear & Greed Index has seven indicators. Here’s what they’re saying right now:
Market Momentum = Neutral.
Stock Price Strength = Extreme Greed.
Stock Price Breadth = Neutral.
Put and Call Options = Greed.
Market Volatility = Neutral.
Safe Haven Demand = Extreme Greed.
Junk Bond Demand = Extreme Fear.
The only place on that list we see “Fear” is demand for junk bonds.
But with safe, government-backed bonds like 10-year Treasurys yielding over 4% for the first time since November last year, it makes sense not to opt for risky junk bonds right now.
Here’s what this index tells me…
Contrary to what you might think, investors are still buying stocks hand over fist.
The number of 52-week highs is outpacing 52-week lows for the first time in over a year.
And people aren’t hedging their risks with options like you might expect.
We know that because the put/call ratio is around 0.9. When the market is truly worried, that stays well above 1. It was 1.2 in late December 2022. This is also what happened during the pandemic crash of 2020. The S&P 500 fell over 20% in just 16 days. Now you know why this metric deserves our attention.
So why are investors greedy right now?
Could it be excitement over companies beating Q4 2022 estimates? That could drive stocks and investor confidence higher.
Let’s examine that… As of Valentine’s Day, 69% of the S&P 500 had reported last quarter’s earnings. That’s plenty of information to determine if that’s the case.
According to Investor’s Business Daily, the five-year average for the percentage of S&P 500 companies that beat their earnings estimate is 77%.
Out of the companies that have reported thus far, only 68% of them beat their earnings estimate in compared to the 5-year average norm of 77%.
And we don’t even have the fully tally yet.
Maybe their outlooks were really strong, and that’s made investors more confident?
But 78% of S&P 500 companies lowered estimates for Q1 2023. That’s way higher than the five-year average of 59%.
And most alarmingly, nearly 40% of S&P 500 companies that missed earnings had higher stock prices two days after reporting. This is highly unusual.
This tells me many investors are living in fantasy land.
They’re buying stocks and ignoring the fundamentals.
If the company can beat the market on any metric, that’s enough to hit the “buy” button.
Meta Platforms (META) and Tesla (TSLA) are good recently examples. Both surged double-digits after releasing mixed earnings. In a normal environment, they’d have traded flat or sold off.
And as odd as it seems, “Extreme Greed” is exactly what you’d expect before the recession hits. People pile up right before the big drop.
That’s why the stock market declines an average of 29% during a recession. In a really bad one, like 2008/2009, it can exceed 50%.
How to Prepare
Despite what regular investors are doing – buoyed by any good news they can get their hands on… Many skilled investors are warning of a recession.
And based on what I’m seeing from the disconnect between weak fundamentals and positive investor sentiment… It might come sooner than we think.
That’s why Editor Brad Thomas and I have been working behind the scenes to build a new service.
It’s designed to not only withstand a recession – but profit from it.
How? By following what the smart money – which has survived dozens of previous recessions – does to boost their income in volatile markets.
We included many of the strategies I learned while working on Wall Street from top managers, including Apollo (which manages $512.8 billion), Bain Capital ($155 billion) and Blackstone ($880.9 billion).
Our strategy utilizes a little-known financial instrument we call “COMs” (Contractually Obligated Money).
And Wall Street has already invested $23.9 trillion in this financial asset.
What makes this strategy so amazing is it guarantees that as long as a company is in business – no matter whether it makes a profit or loss – by law, it owes you money. And that could be in the tens of thousands of dollars.
It sidesteps market exposure, risky investments, and recession risks.
That makes it a perfect complement to our Sleep Well at Night (SWAN) investment style.
To learn more about it and how to get involved, click here to see a special presentation that will explain everything you need to know. You’ll even get the name of a recession-proof investment just for watching.
The time to prepare for a recession is now. We already know average investors aren’t. But by acting now to protect your finances, you’ll be far ahead of the game.
Stephen Hester, CFA
Analyst, Intelligent Income Daily