Investors Are Coming Back to Reality

I hate to burst your bubble, but the joyride is over. It’s time to bring the car into the garage and deal with the repercussions. I’ve been pounding the table for weeks warning that it was going to happen.

The reaction to fourth-quarter earnings was a surreal experience for me. I watched investors get excited about numbers and news that I would call only slightly positive. And anything negative or uncertain got swept under the rug as though it didn’t matter.

However, the latest run of unchecked optimism might just be over.

I’ve talked about the CNN Fear and Greed Index before. It’s designed as a gauge of investor sentiment. I use it to help judge whether stocks are fairly priced. In periods of greed, we’ll find the markets are generally overpriced… when the mood turns to fear, the opposite will be true.

There are lots of ways that analysts can measure investor sentiment. I like CNN’s because it uses seven different indicators in its calculation. The gauge has been in the greed and extreme greed territory since November. Then earlier this month, it slid back to neutral… and then into fear.