U.S. stocks are flashing signs of euphoria, contrasting with a muted crypto market as traders look to divine clues on what’s next.
The Bank of America's Global Equity Risk-Love indicator, which provides a gauge of investor sentiment, suggests that investor positioning, volatility, and technicals in the stock market are becoming dangerously bullish.
“BofA’s Global Equity Risk-Love indicator jumped to 1.4, its highest in 13 months,” The Kobeissi Letter wrote in a tweet on Monday. “This metric has surged from panic levels to euphoria in just 4 months. Since 1987, sentiment has only been higher 7% of the time.”
Since April, both the U.S. stock market and crypto have experienced rapid growth, buoyed by dovish economic data and ETF flows.
Two of crypto’s largest coins by market capitalization have remained flat over the last seven days, clocking in less than a percent for Bitcoin and a negative 0.4% return for Ethereum, CoinGecko data shows.
If investor sentiment tips into excess, a risk-off turn could spark a pullback in equities that would likely spill into digital assets, deepening Bitcoin’s recent slide.
The question is whether the optimism has truly reached that point.
The bank acknowledged in its August report that the recent surge in the S&P 500 index and meme stocks "has been enough to raise some eyebrows."
Still, it clarified that despite this "disconnect between investor enthusiasm and fundamentals, it is not a risk that we're overly concerned about for now.”
Individual investors are taking a cautious stance, according to a recent sentiment survey from the American Association of Individual Investors.
The survey showed that only 15.5% of respondents remained bullish, indicating "euphoria" is missing among retail and short-term traders.
Crypto’s Fear and Greed Index also shows a similar outlook, with “fear” being the dominant narrative.
The crypto market outlook remains skewed in favor of bears in the short term due to September’s seasonality, which has yielded an average return of 3.34% over the past 12 years, Decrypt previously reported.
The September 5 jobs data release may allow investors to position themselves ahead of the September 17 rate cut decision, but for now, traders are taking a defensive stance.
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