Investor Sentiment Has Reverted Fear to Froth
In my March 31st commentary,“Is the War Over? If so, Bears are Trapped,” I referenced several market extremes, specifically from an investor sentiment perspective. For instance, although the market had merely suffered a “garden variety” correction in terms of depth, investor protection soared with the put/call ratio surpassing that of the 2025 Tariff Tantrum. However, extremes have now shifted to the other end of the spectrum. For instance, on Thursday, the S&P 500 Index traded a staggering $2.6 trillion worth of notional call options yesterday, marking an all-time high and exhibiting investors’ euphoria and frothiness.
Image Source: Zerohedge
Meanwhile, the frothy market sentiment is beginning to appear in the “CNN Fear & Greed Index.” In late March, the Fear & Greed Index flashed an “Extreme Fear” reading. However, just one month later and the CNN Fear & Greed Indicator suggests that investors have adopted a “Greed” mindset.
Image Source: TradingView
Leading Stocks Reach Fibonacci Targets
Fibonacci extensions are used by technical-oriented traders to project potential price targets. For stocks to reach the 4.236% Fibonacci extension, it is extremely rare and often represents a near-vertical or climactic move. This week, several leading technology stocks surpassed the 4.236% Fibonacci extension, including Intel (INTC), Micron (MU), Advanced Micro Devices (AMD), and Sandisk (SNDK).
Image Source: TradingView
While these stocks have had several consecutive green weeks and are going parabolic, it does not necessarily mean they have topped. That said, reaching such an extreme Fibonacci target does suggest that the risk-to-reward at these nose-bleed levels is simply not as optimal as it was a few weeks ago. Additionally, the Nasdaq 100 Index ETF (QQQ) is 14% above its 50-day moving average. Although such a powerful move is correlated with strong long-term performance, it does indicate that equity markets may be overheated in the short-term.
Mid-Term Election Seasonality
Historical seasonality patterns suggest that equity markets tend to encounter some pre-mid-term election volatility before resolving higher. With equity markets up several weeks in a row, some digestion would make sense at this juncture.
Bottom Line
Investor sentiment, Fibonacci target levels, and simple gravity suggest that equity markets may be due for a well-deserved breather. That said, the recent price action suggests a shallow correction is likely and that markets may correct mostly over time rather than price.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
