At least that is what the widely followed CNN Fear & Greed Index is telling us right now. The index rose above the 50 level early this month to a recent reading of 58.
This fear & greed index tracks seven market-based indicators including new highs vs. new lows, stock market breadth and the CBOE Market Volatility Index (VIX), the so-called stock market fear gauge.
Readings range from 0 to 100. And while not yet at an extreme fear level, anything above 50 does tell you greed is growing. That has historically meant trouble ahead for stocks.
The chart above, put together by analysts at Sentimentrader.com, shows a 20-day average of their CNN Fear & Greed proxy going back a few years.
It shows you clearly that contrary to Gordon Gekko’s famous line, greed isn’t always good. Not when it gets too extreme anyway.
You can see that every time the moving average of greed reached an extreme high level, the stock market was vulnerable to a setback.
Some were significant corrections. As you can see above in 2018 and again early this year.
But some were relatively mild pullbacks, as in in 2019.
How severe the correction will be this time around is difficult to say. But the good news is I’m not expecting a repeat of the March madness Coronavirus crash.
I am expecting a milder pullback this time around.
But either way, there is one surefire way to be prepared with your own investments.
As I pointed out in last week's article, by simply avoiding the stock market’s junk stocks you will be immune to a lot of the volatility. Instead, stick with higher-quality companies when stocks pullback.
What does quality mean? It means focusing on names you already know and love. Blue chip stocks that earn high marks for credit quality (A- or B-rated). And the higher the better.
That is the best solution. At least until this market turbulence blows over. With new profit opportunities to follow sooner rather than later.
Good investing,
Mike
P.S. I’m sticking with the highest-quality companies I can find for my Independent Incomemembers, go here for more details!
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