Ephemeral Bull & the Fragility of Sentiment

by

The market, that capricious lepidopterist, is rarely swayed by the solid geometry of fundamentals. No, it prefers the iridescent flutter of sentiment, the momentary mania for momentum. A collective good feeling, a shared delusion if you will, can inflate valuations to the point where gravity becomes merely a suggestion. And we, the diligent observers of this aerial ballet, find ourselves perpetually assessing the tensile strength of these ephemeral bubbles.

The recent years, drenched in the artificial luminescence of the AI boom, have gifted us with a trio of double-digit returns for U.S. equities. A pleasing arithmetic, certainly, but one that has also cultivated a dangerous complacency, a self-satisfied smirk upon the face of the market. This, naturally, elevates sentiment to altitudes rarely charted, a veritable stratospheric euphoria.

Bank of America, in their latest dispatch from the front lines of finance, reveals that their Bull & Bear Indicator has ascended to 9.4 in January. A rather gaudy number, isn’t it? “Hyper-bull,” they proclaim. One imagines the bulls themselves, flushed with victory, indulging in a rather excessive amount of champagne. It is, incidentally, the highest reading since January 2018 – a date that should, for those with a long enough memory (or a sufficiently detailed chart), prickle the skin with a premonition of things to come.

The Echo of ’18: A Cautionary Tale in Volatility

Ah, 2018. A year when optimism, like a particularly tenacious vine, had coiled itself around the ankles of investors. The S&P 500, emboldened by a previous year’s ascent of approximately 20%, continued its climb into the early months. Simultaneously, the Chicago Board Options Exchange Volatility Index – the VIX, that nervous barometer of market anxiety – had settled into a disconcertingly placid state, hovering in the high single digits for extended periods. It was, in short, an invitation to hubris.

Investors, lulled into a false sense of security, began to engage in a rather peculiar form of wagering: selling volatility-linked futures contracts. A gamble that the prevailing tranquility would endure. A profitable endeavor, naturally, so long as the VIX remained subdued. But volatility, like a slumbering beast, is rarely content to remain dormant indefinitely.

Then, in February of that year, came “Volmaggedon.” A sudden, violent spike in volatility, catapulting the VIX to 50 in a matter of days. The short volatility trade, that elegant edifice of speculation, crumbled into dust. The S&P 500, predictably, shed 10%. Overconfidence, that most insidious of market poisons, had once again exacted its toll. And, as if on cue, the Bull & Bear Indicator had flashed its warning mere weeks prior.

Recurring Refrains: Signals from the Past

The indicator, it seems, possesses a knack for identifying the precarious tipping points of sentiment. In February 2020, it signaled oversold conditions just before the COVID-19 pandemic descended, plunging the U.S. economy into chaos and the S&P 500 into a precipitous decline exceeding 30%. A rather dramatic confirmation, wouldn’t you agree?

And before that, in 2006 and 2007, it flashed similar warnings, coinciding with the intoxicating belief that home prices would defy gravity indefinitely. That delusion, fueled by reckless leverage, culminated in the financial crisis of 2008, a crash in the housing market, and a decline of over 50% in the S&P 500. A rather unpleasant memory for those who lived through it.

The Gathering Clouds: A Potential Correction Looms

Now, while the Bull & Bear Indicator is hardly an infallible oracle, its historical accuracy suggests that investors may be indulging in a touch too much optimism, leaving U.S. stocks vulnerable to a pullback. A prudent investor, therefore, might consider a slight recalibration of their portfolio, a subtle repositioning for the inevitable ebb and flow of the market.

2008 and 2018 serve as stark reminders of how overconfidence can lead to dangerous behaviors. Interestingly, the latest global fund manager survey also reveals a historically high allocation to equities and historically low cash levels. A rather unsettling combination, wouldn’t you say? Perhaps, we are once again embarking on a similar trajectory, a slow waltz towards the precipice. And 2026, well, that date may just prove to be… interesting.

Read More

2026-01-28 16:32