In addition to our recent discussion of the macro-economic data in the US rolling over, and the epic proportions of net risk-taking longs, Credit Suisse outlines ten further indications that equities might be due for a ‘consolidation’. Translating from sell-side research gobbledygook into reality, equity bulls are merely demonstrating the traditional phases of momentum-inspired euphoria in the face of ongoing fundamental contraction (not to mention a decline in consumption and marginal US purchasing power) – and earnings expectations, US fiscal tightening, and a modest rise in deficit-increasing real bond yields will not help.
Via Credit Suisse:
1) Global risk appetite is extended
Wilmot’s global risk appetite has risen to 1-sigma (i.e. standard deviation) above its norm, while our equity sector risk appetite is now 0.4-sigma above average levels. Only a month ago, equity sector risk appetite was well below normal levels.
2) Hedge funds’ net long positions are now at the highest level since July 2011 and if anything is more optimistic than sentiment-as proxied by the bull/bear ratio.
3) Equity sentiment indicators are close to a two-year high
Our equity sentiment indicator is close to a two-year high, mainly driven by slope of implied volatility skew (1.1-sigma above norm), inflows into equity funds (0.5-sigma), and bullish sentiment (0.6-sigma).
4) The percentage of NYSE stocks trading above their 10-week moving average has risen to above 80%, the top end of its historical range;
5) There has been a slight slowdown in corporate net buying (though, admittedly, there is a seasonal element to this indicator);
6) Insider (i.e. directors’) net selling remains elevated;
7) Higher beta areas in the market are a little overbought
Cyclicals have rallied strongly relative to defensives, especially in the light of the fact that there has, so far, been only a limited improvement in global economic momentum.
But apart from all that – sure, fill your boots…