As of this writing, the United States stock market is hovering around new all-time highs, with the Dow Jones Industrial Average at 28,600, the S&P 500 at 3,235, and the Nasdaq nearing 9.028. However, it appears the stock market has left reality behind as shown by several key indicators flashing red, and an economic hurricane looms on the horizon.
First, the Fear & Greed index is up to 97, which indicates that extreme greed has overtaken the stock market. As explained by the index’s creators “investors are driven by two emotions: fear and greed. Too much fear can sink stocks well below where they should be. When investors get greedy, they can bid up stock prices way too far.”
Essentially, the Fear & Greed index is almost maxed out, with 100 being the highest it can go, and this suggests that investors are FOMOing into a bubble and are no longer looking at fundamentals.
This is proven by the S&P 500 price to sales ratio, which had only gone this high just prior to the dotcom bubble collapse in 2000, and ‘VIXmagaddon’ of early 2018 which resulted in a substantial stock decline, as shown in this chart.
Further, corporate profits are typically highly correlated with the S&P 500 in a healthy market. However, since 2016 corporate profits have been flat, while the S&P 500 has raced higher, leading to an extreme decoupling as shown in this chart. The last time there was such an extreme decoupling of the S&P 500 and corporate profits was during the dotcom bubble.
Indeed, it seems that some of the same forces that drove the dotcom bubble past its equilibrium are driving the current stock bubble. The Federal Reserve injected tons of liquidity into the market as a countermeasure against ‘Y2K,’ but eventually the market crashed anyway because of numerous dotcom companies going belly up.
Right before the dotcom bubble collapse, the Federal Reserve was pumping liquidity into the market. Now, it’s far more, with $850 billion being printed and injected in the past six months as discussed in-depth in a previous Crypto.IQ article.
It seems that the dotcom bubble is actually the best analog for the current situation, with the Fed pumping in tons of liquidity despite an apparently ‘healthy’ stock market.
Essentially, stock investors believe that the Federal Reserve will not allow the stock market to crash, and will always be there to inject massive amounts of liquidity whenever trouble arises. This has led to the extreme greed on the Fear & Greed index, which basically means that investors are throwing everything they can into the stock market to ride this Fed-powered bubble, with no consideration that all bubbles eventually pop.
The most stunning fact is that the S&P 500 is up roughly 70% since 2016, and during the same period of time corporate profits have not risen significantly. This is fundamental proof that the stock market is now based on a false reality since, if the market was healthy, stocks should be flat as well.
These indicators together suggest that a stock crash will be coming soon. Whether it turns into a recession remains to be seen. Indeed the Fed could print as much as it takes to prevent an actual bear market. However, no market can continue rising this far beyond fundamentals without coming down hard.
On the sidelines is Bitcoin (BTC) that was launched in 2009, coinciding with the beginning of the stock market bull run that started after the Great Recession. During the entirety of Bitcoin’s (BTC) life so far the stock bull run has continued, making stocks a more favorable option for institutional investors.
However, the time Bitcoin (BTC) has been waiting for could be coming soon. The Fear & Greed index hitting maximum greed and stocks completely decoupling from sales and profits is indicative of a dotcom style bust in the not-so-distant future, and if that happens, Bitcoin (BTC) would likely become a top alternative investment and safe haven.
Crypto traders should keep a close eye on the stock market. The stock bubble is hyperinflated, and any significant negative economic news could act as the needle to pop it, at which point a Bitcoin (BTC) rally seems likely.