We've entered a new era of investor psychology... Sentiment indicators show extreme lows. Interest rates are rising. Inflation feels out of control. And food and energy prices are soaring to unprecedented levels.
The Fed Broke How Investors Think
By Pete Carmasino, chief market strategist, Chaikin Analytics
We've entered a new era of investor psychology...
Sentiment indicators show extreme lows. Interest rates are rising. Inflation feels out of control. And food and energy prices are soaring to unprecedented levels.
So it's no surprise that we're seeing nasty headlines in the media. "Markets in Turmoil" segments are leading financial TV shows. And they're even making the network news.
Despite all that fear right in front of us... investors still haven't panicked yet.
The S&P 500 Index closed at an all-time high on January 3. And then, it took more than five months for the benchmark index to hit its low (so far). It fell almost 20% in that span.
But importantly, investors aren't panicking and selling everything at once. The markets aren't plunging every day.
It has been an orderly sell-off. In fact, I would call it the "most organized chaotic sell-off" I've seen in 20 years.
The problem is... the Federal Reserve has broken how investors think.
To understand why, we need to dive into a bit of market psychology...
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Maybe you've heard of "normalcy bias." It's the idea that people expect the past to repeat itself. They're in denial. They believe, "What I've always experienced must be normal."
That concept is playing out in the markets right now...
After all, the Fed is always there to bail markets out of a jam. That's what we've come to expect.
The Fed has created a "normal" that encourages folks to ignore legitimate fears and risks.
It's hard to understate the extreme nature of the Fed's approach. Every time investors felt the tickle of panic over the past 12 years, the market would bottom and move higher.
That's because the good ol' Fed came to the rescue. And as a result, investors relearned how to respond to fear.
We can see that through the Chicago Board Options Exchange's Volatility Index ("VIX"). It's also known as the market's "fear gauge" because it typically spikes when times get tough.
The VIX measures investors' expected volatility over the next 30 days. As a result, this investor-anxiety thermometer typically jumps when the markets plummet.
But that isn't happening today...
The VIX's highest recorded level does not line up with the lowest point of the S&P 500. You can see what I mean in the following chart...
Notice that the VIX's 2022 peak so far was about 37 in early March. That coincided with the S&P 500's low at the time.
But then, when the market went even lower in mid-May... the VIX didn't make a new high.
In other words, stocks fell to their lowest point so far this year. But instead of panicking, investors simply thought, "What does it matter? The Fed will stop the bleeding again."
We can see the lack of investor panic in the bond market, too...
The current yield on the 10-year U.S. Treasury is more than 3.2%. It has doubled so far this year.
Historically, that's a surefire way to get investors to panic. That's because rising rates mean the economy is slowing. And that should be enough to get people to head for the exits in droves, right?
Wrong again.
Investors simply aren't throwing in the towel yet. Panic isn't reaching a level that we would expect based on the usual suspects of fear...
Therein lies the cognitive bias of what we believe to be normal. Over time, investors have learned not to do much about their fears in the wake of such negative outlooks.
In other words, it looks like the Fed has broken how investors think about the markets. We've moved from "FOMO" (the Fear of Missing Out) to "FOGO" (the Fear of Getting Out).
For now, this learned behavior is holding up the markets. Investors aren't panicking yet.
But be warned... Everyone has a breaking point.
Good investing,
Pete Carmasino
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
-2.67%
3
23
4
S&P 500
-2.87%
44
341
111
Nasdaq
-3.53%
5
67
26
Small Caps
-2.69%
224
1148
513
Bonds
-0.62%
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks have become Bearish. Major indexes are mixed.
* * * *
Top Movers
Gainers
NEM
+3.52%
CAH
+2.12%
HSY
+1.86%
BAX
+1.51%
K
+1.34%
Losers
CZR
-9.29%
ILMN
-9.04%
ETSY
-8.70%
ADBE
-7.64%
BKNG
-7.59%
* * * *
Earnings Report
Reporting Today
Rating
Before Open
After Close
ORCL
No earnings reporting today.
Earnings Surprises
No significant Earnings Surprises in the Russell 3000.
* * * *
Sector Tracker
Sector movement over the last 5 days
Energy
-0.84%
Staples
-2.57%
Health Care
-3.34%
Utilities
-4.05%
Communication
-4.88%
Industrials
-4.93%
Discretionary
-5.58%
Materials
-5.77%
Real Estate
-6.09%
Information Technology
-6.36%
Financial
-6.77%
* * * *
Industry Focus
Telecom Services
5
22
18
Over the past 6 months, the Telecom subsector (XTL) has underperformed the S&P 500 by -1.78%. Its Power Bar ratio, which measures future potential, is Very Weak, with more Bearish than Bullish stocks. It is currently ranked #9 of 21 subsectors and has moved up 3 slots over the past week.
Indicative Stocks
UI
Ubiquiti Inc.
CALX
Calix, Inc.
CMTL
Comtech Telecommunic
* * * *
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