Posted in: Market News
Published:
January 7, 2020 12:15 PM UTC

Dow Futures Rise with Stock Market at Brink of Epic Euphoria Rally

Dow Jones Industrial Average (DJIA) futures point to stock market optimism as 'extreme' greed takes hold of the market. Big rally ahead?

  • Dow Jones Industrial Average (DJIA) futures bounced back in early trading Tuesday, shaking off the geopolitical tension between Trump and Iran.
  • The stock market is now at ‘extreme greed’ which is likely to trigger a flurry of investors FOMOing into stocks.
  • Prominent economist Jeremy Siegel warns of a final euphoric melt-up before stock market correction.

After two jittery days on the stock market, Dow Jones Industrial Average (DJIA) futures point to a strong rebound on Tuesday morning. And despite rising geopolitical tensions, all signs point to a final, euphoric blow-out for the Dow and S&P 500.

CNN’s fear and greed index now reads “extreme greed,” the highest level in more than two years. Investors are greedily rushing into stocks to squeeze the last drops out of this decade-long bull market. The fear of missing out (FOMO) could push the DJIA into a melt-up phase, exploring new record highs, before the inevitable breakdown.

At a reading of 93, CNN’s fear and greed index hits a two-year high. Source: CNN

Dow rebounds as Iran tension fades

Dow futures contracts climbed a modest 39 points on Tuesday after a choppy overnight session. Traders appear to be brushing off fears of all-out conflict in the Middle East after Trump’s assassination of Qassem Soleimani.

Dow Jones Industrial Average (DJIA) futures climb higher after volatile overnight trading. Source: Yahoo Finance

S&P 500 futures and Nasdaq Composite futures were up 0.15% and 0.34% respectively. Bitcoin traded at $7,866 after briefly touching the $8k mark overnight.

Stock market hits ‘extreme greed’

The CNN fear and greed index is a tool that measures investor sentiment in the equity market. At a reading of 93, the index is flashing its highest level in two years. With the Dow and S&P pushing into record highs, investors are getting greedy.

The fear and greed index hits a two-year high. Source: CNN

What does this mean? It’s likely that retail investors will throw money at stocks on the back of positive headlines and new record highs. It’s a rough indicator of FOMO which could push the market into a euphoria phase.

Indeed, last time the indicator was this high, in late 2017, the Dow entered a blow-out run, chalking up a further 13% before correcting in early 2018. This is a classic late-stage euphoria sign.

Last time CNN’s gauge hit “extreme greed” (marked in red), the Dow soared 13% higher before correcting. Source: TradingView / CCN

Economist warns of Dow melt-up

Jeremy Siegel, professor of finance at the Wharton School of Business, has a similar take. He sees a possible melt-up in stocks as traders take on more risk.

One of the dangers is that people could be throwing risk to the wind and this thing could be a runaway. We sometimes call that a melt-up and produces prices too high.

Siegel told Barron’s Market Brief that stocks aren’t yet overvalued, suggesting there is room to make a euphoric run higher. The equity market, he argues, is still supported by low interest rates and relative trade peace between China and the US going into 2020.

BUT: watch out for the stock market comedown

Following any period of euphoria, there is the inevitable comedown. The stock market is no different.

Let’s look at the fear and greed index again. While an “extreme greed” rating often indicates a short-term flurry of buying, it almost always indicates a local top. Shortly after hitting the greed phase, there is a correction as the FOMO buying becomes unsustainable.

After the late 2017 ‘greedy’ run, the DJIA erased those gains in just three months, followed by the deep Christmas selloff later in the year (see chart above).

As Sigel warned:

If there’s a shock, you come down to Earth.

This article was edited by Samburaj Das.

Now Watch: CCN TV

Last modified: January 22, 2020 11:39 PM UTC

Ben Brown @_ben_brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.

More of: Dow Jones
Show comments