Panic and Euphoria in the Markets

This week should be pretty volatile, with plenty of government data, earnings announcements and Fed action to push markets to and fro. Many traders are paying special attention to the GDP announcement Wednesday morning and the FOMC news later that afternoon. As is our wont, we advise taking off some risk ahead of Fed meetings.

Markets were very quiet until the last forty-five minutes yesterday, trading on very light volume, and the S&P 500 emini futures weren’t able to break above the 1404 level. Some higher volume selling pushed the Dow and the SPX into negative territory into the close.

Citigroup (C) must have updated the methodology for their panic/euphoria model, as cited regularly in Barron’s. We know this because - as you can see from the chart below - even at the absolute peak of exuberance back in October 2007, the model gave an official reading of “0″, meaning sentiment was neither euphoric nor panicked.

Those of us who were alive and trading during those halcyon days might remember things somewhat differently.

In any case, that same panic/euphoria model registered a reading above 0.3 over the weekend, which must be the highest on record, and only makes sense if you assume that some new methodology has been put in place. We’ll reset our expectations about this metric, and see whether it provides any useful indications going forward.

Speaking of Citigroup: David Gaffen at the WSJ MarketBeat blog has a good piece on why the rally in banking stocks may have overextended itself.

Comments

[DWest:]

Don't look now...it's reading +.54

2008 May 18 03:26 AM