Chart of the week
Investors are driven by two emotions: Fear and greed. Too much fear can cause stock prices to fall far below where they should be (and a sharp rise in the markets would then occur). When investors get greedy, they can drive stock prices way up (and in this situation, a crash is near).
Why this matters:
In just one week, the index has dropped from 69 (greed) to 31 (fear). Such a quick turnaround is rare. In the long run, after such a sharp turnaround in investment sentiment, there is usually a strong counter-reaction. There is every indication that the market turmoil of the last week has led to a strong exaggeration and that the markets will recover.
Omicron triggers panic
At first glance, the graph is really worrisome. The variant seems to be much more contagious. But the data is based on very few numbers. Moreover, the variant has appeared in regions where there have been few infected people and vaccination rates have been low. Whether Omikron will spread as much in the U.S. or Europe, where it has strong competition from other variants and where many are vaccinated, remains to be seen.
In addition, after 1.5 years of Covid, governments in developed countries have become smarter and will look for ways to ensure isolation while not driving the economy completely to the wall. And another factor, not to be forgotten, is the helping hand of central banks.
For these considerations, institutional investors are also looking to build their market positions:
The Smart Money Flow Index (SMFI) is based on the idea of Don Hays' Smart Money Index (SMI), but uses a slightly different time period and formula to remove emotional trades from the price action of the Dow Jones Industrial Average.
The chart indicates that the large and well-informed investors (smart money) used the last week to build positions. Friday's sell-off was driven primarily by retail investors. This gives us reason to be confident. In combination with the Fear & Greed Index, the conclusion is that this is a short correction and there should not be a big market crash now.
Jerome Powell may continue
Current Federal Reserve Chairman Jerome Powell was nominated by Donald Trump 4 years ago and his term is about to expire. Now, US President Joe Biden has decided to nominate Powell for another second term. With this, Biden sends a strong signal to the investment markets that stability is more important to him than party politics in the current turbulent covid times.
The opposing candidate and the darling of left-wing Democrats was Lael Brainard. She wanted the FED to do more to green the economy. As laudable as this plan is, political action is out of place in the Federal Reserve. It would diminish its credibility. If you want to bring more sustainability into the financial markets via regulation, you have to give this task to the Ministry of Finance and not to the central banks.
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