Fear & Greed Flashes Warning Sign Amid S&P 500 Rally
Let's take an in-depth look at the stock, options and bond markets to see what's in store for the S&P 500.
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Fear is back. Are you afraid?
The real question is, should you be? They say that markets climb a wall of worry. And, if you read the news or talk to your nosey neighbor, there’s a lot to worry about. From tariffs, to geopolitics, to fires, to teenagers who may have access to your sensitive data and, of course, lions, tigers and bears. Oh my!
Does that mean that the market is ripe for a rally?
That’s not what the Fear & Greed Index is saying. In fact, it’s saying that this market is losing 2024's upward momentum. Oh my!
Last week, we talked about the divergence between the stock market and the Fear & Greed Index. The stock market remains near all-time highs, but it isn't making new highs. Meanwhile, Fear & Greed decays.
All Stock Market Indicators Show Fear
Market momentum compares the S&P 500 to its 125-day average. The average remains in an uptrend, which is bullish. But the S&P itself has gone sideways since November. Whereas it spent much of 2024 trading between one and two standard deviations above the 125-day average, it’s now having a hard time getting above that one standard deviation level. It hasn't rolled over, but upward momentum is halted.
Both measures of breadth are rolling over and have declined from last week’s scores. Net-new 52-week highs have not increased in February, and volume-based breadth is actually lower. The Magnificent Seven are no longer as magnificent as they once were, but they’re also taking other stocks down with them. Breadth is unimpressive.
Options Show a Decline in Speculation
The put/call ratio has been rising, showing that traders are less aggressively bullish. The VIX has yet to rally, so, let’s say that options are trending in the direction of fear but not giving a clear signal.
Bond Market Indicators Were Greedy. Today, They’re Mixed. Let’s Look Closer.
Safe haven demand, or the difference in 20-day stock and bond returns, is nearly zero. In other words, for the last month, bonds have performed as well as stocks. Is that good? People are (finally) fleeing to the safety of U.S. treasuries.
Junk bonds indicate greed but the recent spike downwards in this indicator tells me that we can’t trust this signal right now (see CNN's footnote below). There’s a mistake in CNN’s code that calculates yield incorrectly. I’ve told them about it, but it hasn’t been fixed yet.
So, let's look at the underlying components. Comparing the performance of junk and investment-grade bonds, we can see that investment-grade bonds have been beating junk in 2025. Let’s put this in the fear column, too.
Where Does That Leave Us?
In a state of fear! But not panic.
Is there a chance that stocks could climb a wall of worry? The long-term trend remains upwards, so there's always a chance the market will surprise to the upside. But, there’s just too much fear in the Fear & Greed Index to think we’ll set significant new highs right now. At best, I feel like we could see rotation out of the mega caps and into smaller-cap companies, which is something we discussed in our recent Live Quarterly Meeting.
At the time of publication, Meshnick had no positions in any securities mentioned.
