Fear is getting out of hand.

Right now, markets are overreacting to fears of a potential AI bubble, and on fears the Federal Reserve may not cut rates again this year, with lower odds of a cut.

In fact, traders are now pricing in a 52% chance we’ll see a quarter-point cut in December, as compared to the 62.9% likelihood we saw yesterday, and 95% from last month. Plus, if you want to see just how overvalued markets have become, check out the Shiller P/E ratio, which is starting to reverse from its second-highest peak in market history.

In addition, all of the major indices just broke below their 50-day moving averages, which have served as strong support since August.

But it’s all getting a bit out of hand.

Also, when fear gets out of hand, that’s when you want to start betting on the long side of the markets, as we’ve learned from some of the most successful investors.  For example, Buffett tells us to be greedy when others are fearful, and fearful when others are greedy.  Baron Rothschild tells us to buy when there’s blood in the streets.  Sir John Templeton tells us to buy on excessive pessimism when others run scared. 

We also have to consider that volatility is getting a bit stretched, which we can see with the Volatility Index (VIX). We can see that with the over-extensions on RSI, Full Stochastics, and Williams’ %R – all of which have served as strong indicators of VIX reversals lower.

In fact, look at what happens with the VIX every time RSI runs to or above its 70-line, when Full Stochastics jumps to or near its 80-line, and when Williams’ %R gets to or above its 20-line.  Not long after, the VIX drops.

Sincerely,

Ian Cooper