‘Manic’ Market Optimism Is a Warning Sign to Investors

There’s been little to shake the happy-go-lucky attitude in US stocks this year. To some investors, all that optimism suggests there may be trouble ahead.

The pessimist take at the moment is that investors have largely already filled up on stocks, so there’s not a lot of buying power left to keep propelling higher prices. One indicator, known as the Bloomberg Intelligence Market Pulse Index, combines metrics like market breadth, volatility and leverage, to create signals of investor sentiment.

The latest reading is at “manic levels,” according to BI equity strategist Gillian Wolff, which indicates “the market remains vulnerable in the short run.”

When the gauge reached such a threshold in the past, the Russell 3000 Index gained 1.7% on average in the next three months, a fraction of the roughly 9% advance posted whenever the index flashed “panic.”