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Back in the Greedy Territory

July 14, 2020 By Mircea Vasiu

It was only a few months ago when the now-famous CNN fear and greed index showed extreme fear levels. As the stock market in the United States plunged the quickest in history, investors liquidated positions as they had margin calls to meet.

How fast things change! Fast-forward to July 2020, and the fear/greed index enters the greedy territory. Investors are pouring into the market at an unprecedented rate, and many voices call for a bubble.

Only yesterday, the number of Robinhood accounts that added Tesla to their portfolio increased by thousands, sending the stock to sky-high valuation. It ended the day down, but retail traders know no fear – instead, they are getting greedy.

Institutional Investors Reducing Exposure to Equities

Interestingly enough, institutional investors scaled back equity exposure in the previous month – at the same time, their holdings of aggregate, investment grade, or even high yield bonds. That leaves retail accounts fully exposed to the equity market and with almost no protection against a downfall.

As it turns out, the five largest stocks in the S&P500 represent now their own quartile. In other words, the slightest move into these five names is responsible for sending the index up or down in a blink of an eye. This is the highest concentration in the S&P500 since 1965.

Coming back to Tesla, one of the reasons for the intense speculation on its stock price is the rumor that it will be included in the S&P500 on the rebalancing. As a side note, it is the highest ever stock based on market capitalization not to be included in the index. The expectations are that after the process, many investors are allowed to increase the exposure on the stock, so the bidding at current levels has nothing to do with valuation.

Dividends Plunge Like in the Great Financial Crisis

The second quarter of the year saw the largest decline in the dividend announcements since the 2009 Great Financial Crisis. The reduction in dividends announcements of -$42.5 billion is yet another sign that speculators are driving this market higher and no investors.

For an investor, dividends play a crucial role in the long-term strategy. The power of compounding by reinvesting the dividends is one of the reasons to invest in the first place. The plunge in dividends, therefore, is likely to drive long-term investors out of equities at the moment.

Does it mean that the market is set to plunge?

George Soros, one of the greatest investors of all time, is quoted as saying that whenever he sees a bubble, he is the first one to buy. What he tries to say is that trying to pick the top of a bubble is dangerous. Until the collective mindset does not change, the prices may continue to move higher.