Asian stock indices retreated from their record levels on Monday, indicating cautious profit-taking and a pause in growth. However, it is worth paying attention to the very serious overbought conditions in the markets, which gives us a cautious view.
Last Friday, the US published a relatively weak labour jobs report. However, it failed to generate a meaningful sell-off in the markets as investors were encouraged by the legislators’ greater desire to provide stimulus.
Fear and Greed Index in ‘Extreme Greed’ mode
The president-elect Biden is considering giving out $1200 to Americans and economists see the sluggish labour market report as an excuse for the Fed to increase its QE programme later this month.
The stock market steadily added in November on the news about progress with the vaccine, which the market sees as a positive signal. However, at the end of last week, the growth momentum was driven by fundamentally bad news that spurred hopes for more support from the government and the central bank.
The Greed and Fear Index monitored by CNN is in the “extreme greed” mode at 89, having been at 91 a week earlier. These are very high levels that we last saw at the end of 2019 and in the first month of 2020.
The seasonality is now on the bull’s side. Often at the end of the year, there are prevailing trends to fix losses to optimise taxes. At the same time, profitable strategies can generate new money. As in the previous year, the bullish sentiment may prevail until the end of January, reflecting the very extreme greed.
This is all the more so due to expectations of new support packages, which had been effectively pulling up stocks and commodity prices earlier this year, may now become the driver in the coming weeks.
At the same time, optimists should bear in mind that buying assets in the hope of freshly printed money is a perilous strategy. Supporting the economy only covers some of the needs and lightens the recession, but does not reverse it completely.
It is difficult to predict precisely when markets will pull back on lack of optimism. However, it may well turn out that most assets are already sufficiently overbought for mid-term investors, and the yields/risk ratio is not in favour of new buyers this time around.
The FxPro Analyst Team