The record-setting advance in U.S. stocks is fueling readings of investor bliss not seen since the dot-com era. Gains in Tesla Inc. and Apple Inc. following stock splits helped push the Nasdaq 100 past 12,000.
A sentiment gauge, Citigroup’s panic/euphoria model, which tracks metrics from options trading to short sales and newsletter bullishness, is having its longest run of extreme bullishness since the early 2000s. At around 1.1, the current reading is almost three times the level that denotes euphoria. Tesla jumped 8.5% and Apple climbed 3.6% as the two began their first day of trading at a more accessible price point.
Bulls’ grip on the market is tightening, emboldened by a rally that has shown no signs of abating during the fastest bear-market recovery in history. Up 7% this month, the S&P 500 is poised for the best August since 1986. Options traders are piling in on bullish wagers while bears are fast disappearing. Suddenly, big down days are nowhere to be found and record highs are the new norm.
Stocks “continue to get deeper into euphoric land,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Call this ultra extreme bullishness and while it will only matter when it does, it usually eventually does.”
The S&P 500 has surged more than 50% from its March trough, climbing every month along the way. After fully erasing 2020’s bear market loss, the benchmark gauge has notched a string of all-time highs in August, including six in a row through Friday. Another one would make this streak the longest since 1997. The index swung between gains and losses during Monday’s morning trading.
Momentum chasers are flocking to winners like Tesla and Apple, bidding up their shares and sparking a trading surge incall options. Shares of Tesla are up 450% since the market’s March low while Apple has more than doubled, becoming the first American company to achieve the milestone of $2 trillion in market value. Three S&P 500 companies — L Brands Inc., Advanced Micro Devices Inc. and FedEx Corp. — have seen their shares jumping more than 50% this quarter.
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Helping drive the equity advance are fiscal and monetary policies introduced to combat the Covid-19 pandemic. While the economy and corporate profits are stuck in recessions, the hope on vaccines is instilling confidence in a swift recovery. Investors are willing to pay up for earnings, sending the S&P 500’s price-earnings ratio to the highest level in two decades.
Fear of meaningfully underperforming the market may have prompted money managers to chase the gains, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup. While a dovish Fed offers support to the market, it’s worth noting that similar readings in the panic/euphoria model historically almost always corresponded to negative returns over the next 12 months, he said.
“That’s why we sit there and think about what happened in 1999, 2000,” Levkovich said by phone. “We don’t think it’s the same bubble and we don’t think we have the same Fed policy trend, but it does make us a little concerned that people are a bit too happy with their positioning and too complacent.”
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