When Stock Market Overconfidence Shows Up

How it looks. What it means.

Confidence is a good quality. Too much confidence, though, can come back to haunt you.

Right now, the stock market has entered an overconfident phase and it may go on for days or weeks but a reckoning is just ahead.

It’s the general consensus that inflation is under control and that interest rates can now come back down — all based on selected recent economic data.

Here are the charts which suggest that the consensus, as usual, is wrong:

The number of Chapter 11 bankruptcy filings just exceeded the highs of 2020 and 2018. It hasn’t been at this level since 2010.

The high rates of the past few years have had an effect. Since it remains uncertain whether or how much the Fed will reduce rates, it’s hard to tell when or if these bankruptcy filings numbers start coming down. Meantime, it’s not a good look for the economy.

The S&P 500 and the Nasdaq 100 have taken off as if this problem is resolved. Investors are gambling that it is.

That’s why the bearish sentiment is as low as it gets:

Hardly anyone thinks the stock market will fall from here. That’s overconfidence. The boat is loaded on one side — what happens next?

Corporate insiders have figured it out:

More sellers than buyers among those who know. Sam Walton and Walmart insiders, for example:

Longview Economics puts it this way:

How much longer can the artificial intelligence hype keep highly favored tech and social media stocks at new highs?

Powerful trends can stay in place for longer than you’d think — but reality has a way of showing up as well.

Not investment advice. For educational purposes only.