Stock markets big recovery: excessive optimism?
The stock markets have essentially completed their recovery from the slide at the beginning of April. But there are those who see excessive optimism in this very rapid rebound.
Jamie Dimon, CEO of JPMorgan, recently warned that equity markets are showing signs of complacency, ignoring potentially serious risks such as persistent inflation, unstable geopolitics and already high interest rates.
MarketWatch reports the analysis of Jonathan Krinsky, chief market technician at BTIG, who shows how some data and signals seem to support Dimon’s proposed view: among them, low implied volatility and flattening credit spreads, two typical signs of excessive optimism among investors.
Let us look at some market and intermarket indicators.
First of all, as we can see in the chart above, speculative bonds returned to do better than the overall basket, resuming the positive sentiment that had driven them in the best period of the Trump trades. The indicator is now at last November’s levels, back above the 200-day average.
The CBOE Equity Put/Call Ratio, the ratio of volumes of put options (which take advantage of stock declines) to call options (which gain on rises) is below the critical threshold of 0.7 points. Levels below this threshold are often considered extremely optimistic.
The Equity vs Bond Rotation ratio, shown in the chart above, highlights the strong resurgence of risk appetite from mid-April to the present, reaching levels close to the highs seen earlier this year. Once again, the sharpness of the move suggests an excessive degree of investor optimism.
