Optimism among investors and advisors is soaring, and this often forewarns of a stock market crash.
Dear reader; I’m hearing it from my friends and my co-workers. I’m reading it in the financial media. I’m seeing it at financial conferences. The language that often comes before a stock market crash is ramping up again. Lines like “It’s different this time,” “Where else can you put your money?” “Marijuana stocks will only go up more,” and “Apple stock is better than money in the bank!” are what I’m hearing.
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Investor Sentiment Out of Control
Just recently, a stock strategist from Morgan Stanley (NYSE:MS) came out with a bold prediction that key stock indices like the S&P 500 would soar 30% in the next 12 months. “Think 1999 or 2006-07. In a low-return world, investors cannot afford to miss it,” is what he said. (Source: “Morgan Stanley says huge 30% stock surge could be ahead; Like 1999, ‘cannot afford to miss it’,” CNBC, April 10, 2017.)
Investor sentiment indicators are near the point of severe optimism. We could be entering a euphoric state like we did in late 2007 before the stock market started to crash.
The chart below is of the Chicago Board Options Exchange Market Volatility Index (VIX), often referred to as the “Fear Index.”
Chart courtesy of StockCharts.com
Today, the Fear Index stands at the lowest level since 2007, just before the stock market crash of 2008–2009. At the very core, the VIX is saying investors are anything but fearful.
Euphoria: Sign of Coming Stock Market Crash?
How long can this bullishness go on for? Irrationality can go on for a while, but it doesn’t last forever. Eventually, the stock market trades on fundamentals.
Severe investor and analyst optimism these days reminds me of 2007 all over again. At that time, optimism was shooting through the roof, too. Key stock indices like the Dow Jones Industrial Average (DJIA) were edging close to the 14,000 level, and we heard so many calls for even higher stock prices. Sadly, they were wrong. A stock market crash soon followed.
I warn my readers that euphoria is one of the best indicators of an upcoming stock market crash. Don’t ignore it. And remember, it doesn’t hurt to preserve capital by taking some profits off the table.
