Bloomberg
Insatiable stock bulls are calling for more rally races to euphoria
(Bloomberg) – It’s only a quarter of the way to 2021, and stocks have already topped Wall Street’s year-end projections. They are up 10% and have priced in so much optimism that it will be two years before profits catch up. Is that enough for cops? No In a market that has ridden records every five days, investor expectations are the only things that grow faster than valuations. At Citigroup, an indicator comparing the level of panic to the euphoria in the market was put on high year-round, while a Bank of America model that weighs optimism among sell-side analysts was on one 10-year highs have settled on the curvy edge of the market, with a drop in penny stick volume and a drop in meme craze. But the robust appetite persists in its tamer – and still speculative – areas. And while the fortunes of anyone expecting this rally to overheat would have been repeatedly sacrificed, the juxtaposition of stretched feeling and a still healing economy is a source of growing concern for professionals. “It’s strange to see these sentiment measures heightened at the same time. The economy is still recovering,” said George Mateyo, chief investment officer at Key Private Bank. “We got a shot in the arm on fiscal and monetary stimulus” and its impact on the economy “is likely to last a while, but eventually it would fade.” Not that there aren’t many reasons to be bullish as many data points are coming in stronger than expected, vaccine rollouts are (mostly) ongoing, and profits should prop the bull case. If you took a single sentiment indicator at face value and relied on it as a sell signal, it could have meant you missed one of the biggest year-over-year rallies ever. Sentiment levels “are at an extremely high level and we could have been concerned three months ago – we could have worried about them a month ago,” Lori Calvasina, head of US equity strategy at RBC Capital Markets, told Bloomberg TV. “They tell us it will be harder to make a profit. When we get negative catalysts, we are vulnerable to the downsides. But I think it is currently difficult to view this data as an automatic sell signal. “Doubts indicate everything from potential Fed taperings and tax hikes to potential retail investor fatigue. A look beneath the surface already reveals a change in leadership tending towards companies whose growth is seen as more resilient during an economic slowdown. The frenzied buying of cyclical stocks like energy and banks has cooled off over the past month. Defensive stocks like technology, real estate and utilities are moving back to the top of the rankings. Bank of America’s Sell Side Indicator, which aggregates the average recommended equity allocation by strategists, has risen to a 10-year high for the third month. But the cyclical upswing, vaccines, and stimulus are already largely priced in, wrote strategists led by Savita Subramanian. In the meantime, a record amount of equity funds has been absorbed: The inflows into stocks in the last five months were USD 576 billion above the inflows of the last 12 years, according to Citigroup’s panic / euphoria model, which records metrics from options trading, according to Tobias Levkovich, the bank’s chief US equity strategist, stayed in “euphoric” territory for most of the year, generating a 100% historical probability of a decline in markets at current levels for the next 12 months Rest won’t last. The middle part of the VIX curve shows that many expect volatility to pick up, with the spread between the VIX – the market’s fear measure – and the futures on the implied 30-day volatility close to its highest level in around four months five years ago. A trader made a bet last week that the fear indicator would go up to 40 in July rather than drop below 25. The trader appears to have bought around 200,000 calling contracts in total, an amount almost as much as the total daily volume of VIX calls based on the 20-day average of the bull market is over, but it does mean the broad market is down Sell faster and harder when he cringes, ”said Ross Mayfield, investment strategy analyst at Baird. “When the mood is so hot, you hit a new all-time high every day. At some point there will be a correction. If you have short-term money, it makes perfect sense to pay for protection. “Investing all-in stocks for fear of missing out – while staying protected from a downturn – is the preferred stance of hedge funds. Lured by an almost uninterrupted rally since November, the industry has increased its net equity exposure to a multi-year high. Meanwhile, they have stepped up hedging through macro products like index futures and exchange-traded funds. For example, ETF short sales rose 11% this year through March 26. This is based on data from the Prime Brokerage Unit of Goldman Sachs Group Inc. The hedged long approach has become more prominent on Wall Street. On Friday, JPMorgan Chase & Co. strategists, led by Nikolaos Panigirtzoglou, recommended investors hold onto risky assets like stocks but add protection through options on loans and stocks. An emerging risk to the market is the ongoing retreat of retail investors, who have been an unwavering driver of the longstanding bull market. “We don’t think the bull market for stocks is exhausted yet,” the strategists wrote in the note. “However, there are clear indications of increased equity positioning by retail investors and thus future vulnerability to the stock market,” she said. Gene Goldman, chief investment officer at Cetera Financial Group, says his company is looking at ways to reduce risk on its portfolios. “People are seeing the recovery, they are seeing good things today, which is great, but it’s a classic case of ‘buy the rumor, sell the news’ and what they should be doing is looking six to nine months now “, he said. “There are many headwinds that will hit the market.” For more articles like this, visit bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP
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