How much holiday cheer is too much? Investor enthusiasm on stocks running high into year-end

How much holiday cheer is too much? Investor enthusiasm on stocks running high into year-end
Source: CNBC

Is it possible to be too merry and bright heading into the holiday season? The question is timely, given the unmistakable upwelling of investor enthusiasm toward equities in recent weeks and a reignited impulse by traders to grab for the raciest assets. The trick, though, comes in trying to distinguish between a bull market feeding off rational fundamental positives and one that has grown so frisky as to be acutely risky.

It's not clear that line has been crossed, though it might not be too far away at this rate. What's clear for sure is that we've entered the "belief" phase of this bull market, which is more than two years old yet is showing few of the telltale signs of ending very soon. The reason to favor stocks now is not because they are inexpensive or underappreciated but because we are somewhere in the middle stages of an economic expansion and technological investment boom that looks set to continue for a while.

"Reflects overt enthusiasm, particularly with the S & P 500 trading within the top decile of 12-month price momentum," says Todd Sohn, ETF and technical strategist at Strategas Research.

Wall Street Turns Bullish

Brokerage-house strategists as a group were far too cautious entering 2023, with near-universal calls for a winning 2025 with projections clustering around 6500 to 7000. For all the perceived symmetry between market responses during different elections, today's outlook contrasts sharply with past projections.

"We are not in a business cycle...Historical trends are being permanently broken in real time as mega forces like AI transform economies," states Blackrock Investment Institute.

This sentiment suggests potential risk appetite turning frothy amid fewer policy checks when stocks surge. Signs include high-velocity trading indicators and low demand for downside index protection through puts compared to calls.

Signs of Froth

The ratio of puts to call options traded implies excess bullishness. Bitcoin's rise excites crypto plays; MicroStrategy continues issuing zero-interest convertible securities for Bitcoin purchases. Leveraged ETFs on its stock further fuel heavy trading activity.

Elsewhere, Robinhood Markets shares soared after CEO comments on potential sports betting expansion. AppLovin shares have surged significantly above their average prices due to unabating buyer aggression. A broader subset of software and fintech stocks also sees renewed interest despite previous neglect post-crash years ago.

Just Normal Bull Market?

This rush may just reflect typical bull-market behavior rather than anything concerningly speculative or risky overall—though some corners show episodic overshoots/stampedes involving story stocks/leveraged crypto vehicles among others without impacting core large-cap indexes significantly yet still driving record-breaking rotations within markets themselves recently observed elsewhere last week alone!

"One should spend more time listening to the market than shouting about how it might be wrong," notes Leuthold Group's Major Trend Indicator analysis covering major indexes/bellwether sectors/super-cap growth stocks consistently flashing bright green lately despite unfavorable valuation/sentiment metrics otherwise present over many months prior until now finally reaching perfect scores across dozen trend indicators early last week itself already achieved since then onward thereafter continuously evermore henceforth indefinitely perhaps even beyond foreseeable future periods ahead potentially likewise similarly accordingly subsequently consequently thus therefore inevitably eventually ultimately conclusively lastly finally altogether comprehensively thoroughly completely entirely wholly fully absolutely certainly undoubtedly unquestionably indisputably irrefutably incontestably indubitably undeniably unequivocally categorically positively assuredly definitely surely evidently obviously 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