Fear of Missing Out (FOMO) is driving a breakout rally on Wall Street as traders pile into equities. The recent sharp recovery in US stock markets has fundamentally changed investor behavior, shifting focus from risk avoidance to participation.
The S&P 500 rose by 5.8% in the four trading days leading up to August 4. This move ended a period of low volatility; in the approximately three-month period preceding this rally, the index moved within a narrow band of only 5.7%. Since 2006, the average three-month movement range for the S&P 500 has been around 12.5%.
Market drivers and sentiment
Several factors have contributed to the market recovery, including the easing of Middle East tensions, declining oil prices, and strong corporate earnings.
Many fundamental reasons supporting a market decline have weakened.
Interactive Brokers Chief Strategist Steve Sosnick indicated that some institutional investors are now more concerned about missing the ongoing rally than the market falling. This shift in sentiment is reflected in options activity.
The ratio of call options to put options on the S&P 500 reached a one-month daily average of 0.9. This level represents one of the strongest bullish readings in at least four years, signaling aggressive positioning by traders.
Unusual volatility signals
On August 4, while the S&P 500 rose by approximately 2%, the Cboe Volatility Index also increased by approximately one point.
Broad market participation is also evident. The Bullish Percent Index, which tracks the proportion of S&P 500 companies trending upward, rose above the 70% level. LPL Financial noted that the Bullish Percent Index rising above 70% could indicate the market has entered overbought territory.
