Dow Jones: Fear and Greed Index and Buffett Indicator Hint of a Pullback

Dow Jones
Dow Jones

Dow Jones futures are up slightly as investors remain optimistic about the American economy. The index is trading at $28,693, which is the highest it has been since February this year. Other American futures like the S&P 500 and Nasdaq 100 have also gained. However, as I will explain below, some red signs are emerging, which could lead to a pullback of the Dow Jones and the other US indices are ripe for a pullback.

Fear and greed index sends a warning

Looking at the fear and greed index shows that investors have recently become extremely greedy as shown below. For starters, this index measures the performance of the S&P 500 against a basket of factors. Most of these indicators are either extremely greed or greed. The put and call options, junk bond demand, market momentum, and safe haven demand are all in the extreme greed zone. At the same time, the stock price strength and the stock price breadth have moved to greed. Only market volatility is still neutral.

Fear and greed index – extremely greed

Buffett indicator at the highest level in years

Another signal that a pullback of the Dow Jones index is possible is the Buffett indicator. This is an indicator that looks at the current valuation of the US stock market and the total GNP in the US. As you can see below, the US has a total GNP of more than $20 trillion. This is significantly below the Wilshire total market cap of the US.

Buffett indicator at extreme levels

Buffett indicator

Dow Jones getting overbought

Finally, as you can see in the chart below, the Relative Strength Index has risen to the highest level since June. The RSI is one of the most popular tools used in determining whether an asset is overbought or oversold. The same is true with the smart money index and the Relative Vigour Index. To be clear, the index could remain in these conditions for a longer time especially in a low-interest rate environment. However, these indicators increase the risk of a pullback of the Dow Jones and the S&P 500 index.

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Dow Jones Daily Chart

Dow Jones

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