Monday, August 25, 2025
Stocks have been red hot for a while, with the major indices all rallying more than 30% since April lows. It’s been a great trading environment.
So, what’s the problem? Well, everyone is frothy and bullish. Early on in this rally, people were nervous about the global trade war, the economy, and Middle East conflict.
Those issues are still relevant, but they’re not being taken seriously. People have become complacent and it’s showing up in several leading sentiment indicators.
For example, the current American Association of Individual Investors survey shows 45% of investors are bullish. That’s the highest reading of the year and well above the historical average of 38%.
The CNN Fear and Greed Index also hit 78. That’s firmly in extreme greed territory and the highest rating in the past year.
Lastly, the National Association of Active Investment Managers Exposure Index is currently at 99. That’s one of the highest readings of the year, and it’s 22% higher than a recent reading.
Together, these indicators show euphoria. Unfortunately, these sentiment readings and the indices they examine are overextended.
As of this writing. the S&P 500 is trading almost 4% above its rising 10-week moving average. And the Nasdaq 100 is trading 3% above its 10-week moving average.
There are two possible outcomes of this scenario. One is the market pulls back, and a correction resets sentiment. The other option is that the market corrects over time, with stocks trading sideways. This scenario could also reset investor sentiment in a big way if the market’s choppy breakouts won’t work as well.
Now is the time for tighter risk management. Avoid chasing stocks, keeping position sizes smaller than usual.