14.05.25 - Next trigger - the sentiment

Pure optimism is back in the markets. This is not only reflected by a number of stocks reaching new all-time highs but also confirmed by sentiment indicators. The CNN Fear & Greed Index is now just a few points away from the “Extreme Greed” level. An impressive turnaround considering it was still in “Extreme Fear” territory as recently as April 22, just a few weeks ago.

Source: CNN.com, 14.05.2025

Fear & Greed Index - Timeline

Source: CNN.com, 14.05.2025

Markets: Major indices continue their rally, yet signs of exhaustion are emerging. While momentum remains intact, the pace is starting to slow, suggesting that markets may be losing steam after the recent surge.

My view: Momentum is clearly driving the market. After the S&P 500 hit a low on April 8 and a secondary dip on April 21, the index staged a sharp V-shaped rebound, even now turning positive for the year. However, to me, this rebound seems disconnected from the underlying economic reality.

With current momentum, markets are again not just rallying, in my view, they are overshooting, with several indicators now signaling overbought conditions.

I did not anticipate such a strong rally and was positioned more defensively, expecting further downside. In the current environment, I see little justification to adjust that stance. The recent rebound appears largely sentiment-driven, and I do not see sufficient positive catalysts to sustain this rally much further from here.
The sentiment index can be seen as a contrarian indicator: such extreme optimism is often a reliable warning sign, historically marking good moments to reduce risk or take profits.

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