Fear of losses can drive even the most experienced traders and investors to liquidate risk positions and move to the sidelines. Markets witnessed price moves created by fear during the 2008 global financial crisis, the 2020 pandemic, and in early 2022 when Russia invaded Ukraine. These sudden events caused market panic, causing a herd of selling and pushing markets to illogical, irrational, and unreasonable lows.
Greed is another significant factor for the path of least resistance of market prices. Greed causes market participants to overstay their welcome in markets or join a bullish trend to avoid missing a move. Many professional traders and money managers have little choice but to be greedy. Measurements against market benchmarks like the S&P 500 and other macro barometers cause them to attempt to squeeze the last drop from a market trend.
In late May 2023, the markets face many roadblocks. The U.S. debt ceiling issue, rising U.S. debt, the war in Ukraine, the bifurcation of the world’s nuclear powers, inflation, and the trend towards de-dollarization are significant issues that can cause fear and greed emotions to influence market activity. However, markets are calm and have ignored the many macro issues facing all asset classes.
Stocks are calm, and the VIX is very low
The S&P 500 is the most diversified U.S. stock market index. Since falling to the 3,491.58 level on October 13, 2022, the index has made higher lows and higher highs.
The chart highlights the bullish pattern, with the index sitting near the most recent high at over 4,200.
The VIX measures the implied volatility of put and call options on the S&P 500 index. Implied volatility tends to rise when the market falls and fall when the stock market trends higher. Market participants tend to buy options, which are price insurance when they get nervous and sell put and call options to earn premium during bullish or stable trends. Therefore, a bullish trend in the S&P 500 is bearish for the VIX.
The chart illustrates the bearish converse pattern of lower highs and lower lows in the VIX, with the index at 19.11 on March 25, not far above the most recent 15.53 low and far below the late September 2022 35.00 high.
The stock market and volatility index signal that market participants are unconcerned and expect a favorable resolution on the debt ceiling.
Bonds are in a bearish trend, but there is no panic
The U.S. 30-Year Treasury bond futures remain bearish, but the price action has stabilized over the past months.
The chart shows the path of lower highs and lower lows that reached a bottom in late October when the stock market found a low. In 2023, the long bond futures have traded in a sideways pattern between 121-27 and 134-14. The highly liquid iShares 20+ Year Treasury Bond ETF product (TLT) displays the same pattern.
TLT is consolidating between $98.88 and $109.35 in 2023. The bond market is not panicking about the debt ceiling and has stabilized as the Fed reached its 5.125% target on the Fed Funds Rate at the latest FOMC meeting.
Commodity prices have declined from the highs
Commodity prices have moved lower over the past months, experiencing sharp corrections since the 2022 highs:
- Copper fell from its record $5.01 2022 peak to the $3.60 per pound level on May 25.
- NYMEX crude oil dropped from over $130 to under $73 per barrel.
- Grain and oilseed prices experienced significant declines, with corn falling from over $8 to under $6 per bushel. Soybeans fell from over $17.80 to below $13.50 per bushel, and CBOT wheat dropped from above $14 to below $6.25 per bushel.
- Lumber, precious metals, and most other commodity prices have corrected lower over the past weeks.
Bull markets rarely move in straight lines, and the raw materials sector tends to be highly volatile. However, the overall bearish tone to the asset class is a sign that market participants are not worried about inflation or supply chain issues in late May 2023.
Cryptos have rallied but found significant resistance levels
The bear market in Bitcoin and Ethereum that began in November 2021 ended in 2022.
The chart shows Bitcoin’s 77.5% decline from the November 2021 high to the November 2022 low. After recovering, Bitcoin has run into a wall of resistance at the $30,000 level.
Ethereum, the second-leading cryptocurrency, fell 81.8% from the November 2021 high to the June 2022 low. Ethereum has run into a technical roadblock at the $2,000 per token level.
All the talk surrounding de-dollarization in the global economy has not caused cryptocurrency prices to break higher above the critical technical resistance levels.
No fear and greed in markets in mid-2023, but it could be a period of calm before a very volatile storm- Fear and greed are lurking
The news cycle is filled with domestic and international economic and political events that have the potential to roil markets. However, in late May 2023, markets across most asset classes are responding to the volatile landscapes with a yawn.
There is little fear or greed is operating in markets these days, but that could change in the blink of an eye. As we learned over the past years, it is not the things the markets know about and expect but the unforeseen events that trigger the price variance that illicit fear and greed emotions. A quiet market is a perfect time to prepare for the next volatile period, and preparation will avoid the emotional responses that get most traders and investors in trouble.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
