By Thyagaraju Adinarayan and Saikat Chatterjee
LONDON (Reuters) - After a record November, a strong start for world equities this month has triggered some of the "sell" signals monitored by major investment banks, raising chances that the run to record highs is about to pause.
Ranging from retail investor surveys to derivative market positions, many such signals imply that some of the world's biggest stock markets are ripe for a pullback from the euphoric levels hit after a slew of promising vaccine breakthroughs.
EPFR data shows a record $115 billion poured into equity funds in the past four weeks, sending the U.S. benchmark S&P 500 back to all-time highs with a 13% surge in one month. Europe's STOXX 600 gained 15% during the same period.
"There is no doubt that sentiment is still euphoric and overstretched to some extent," said Jimmy Conway, head of EMEA equity trading strategy at Citibank.
Several banks noted "stretched" investor positioning, though they saw it as a minor hiccup before double-digit returns in 2021, supported by vaccine-driven economic recovery.
"In the near-term, the risk of a modest equity market pullback has risen," with Goldman Sachs (NYSE:GS) told clients, citing the worsening virus situation in the United States.
Beyond that, they predicted investors would keep rotating out of cash and into equities.
Here are five charts indicating how investors are positioned in equity markets:
1/ RAGING BULLS
The latest sentiment survey by American Association of Individual Investors (AAII) showed retail investors in a bullish mood; considered a classic contrarian signal, the indicator is hovering near the highest in almost three years.
Graphic: AAII survey https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgmrzwvq/AAII%20survey.JPG
2/ BURSTING CALLS, FALLING PUTS
The frenzy is also visible in options markets. The CBOE put-to-call ratio has hit 20-year lows, at levels last seen just before the dotcom bubble burst in 2000. Put options confer the right to sell at a pre-agreed price and calls allow holders to buy.
Graphic: Put-to-call ratio at 20-year lows https://fingfx.thomsonreuters.com/gfx/buzz/yxmpjqgedvr/Pasted%20image%201607347756390.png
3/ TECHNICALLY OVERBOUGHT
On a technical basis too, the S&P 500 and STOXX 600 are nudging into overbought territory. Their relative strength indexes (RSI) -- a 0-100 gauge of bullish and bearish momentum -- are near 70, a level that leaves them vulnerable to profit-taking.
Japan's Nikkei index entered overbought territory in November and has since ceded some gains.
Graphic: RSI levels at overbought territory https://fingfx.thomsonreuters.com/gfx/buzz/qzjpqdqolvx/Pasted%20image%201607347564147.png
4/ SIGNS OF GREED
Last week, BofA said its closely watched 'Bull & Bear' indicator -- a gauge of market sentiment -- was fast approaching "extreme bullish" levels jumping to 5.8 from 4.7. The indicator runs from zero, indicating extremely bearish and "buy", to 10, signaling extremely bullish and "sell".
It was pinned closer to zero for much of the summer.
Graphic: 2009 versus 2020 rally https://fingfx.thomsonreuters.com/gfx/buzz/dgkplqmanvb/Pasted%20image%201607348723395.png
5/ DON'T WORRY
The S&P 500 has bounced some 65% off mid-March troughs, comparable to their performance in the eight-month period after hitting a floor during the global financial crisis of 2007-2008. Bulls will remind us the index then extended its rally all the way to 2020, meaning there is little cause to worry.
Grpahic: BofA bull & bear indicator https://fingfx.thomsonreuters.com/gfx/buzz/dgkplqmkyvb/Pasted%20image%201607356869496.png