As investor optimism nears a two-year high, analysts are warning that equity markets will retreat

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<pre><pre>As investor optimism nears a two-year high, analysts are warning that equity markets will retreat

The 2020 bull market grew exactly where 2019 left off: with steady growth and another record round.

The S&P 500 index

SPX, + 0.57%

has risen 1.6% since the beginning of the year and the Dow Jones Industrial Average

DJIA, + 0.20%

gained around 1.2% during the Nasdaq Composite Index

COMP, + 0.90%

has gained 3.1% so far this year, and each benchmark has achieved two record trades in the first seven trading days of the year. But these gains could be evidence of stock market exuberance that is preparing investors for a pullback, analysts say.

"The upward trend we are now experiencing has reached an uncomfortable stage," said Jeff deGraaf, chairman of Renaissance Macro Research, during a webcast with customers Monday. In the last months of 2019, he was willing to overlook signs of confidence, as November and December were historically good months for price gains.

"But now that we're losing the seasonal tailwind, the mood is a little more worrying and some of the levels we've seen are similar to what we saw in January 2018," when the S&P 500 lost more than 10% between January 26th of this year and February 8th.

DeGraaf said he was concerned about the put-call rate or the proportion of outstanding options to buy stocks relative to options to sell stocks for the S&P 500 index over a 5, 10, and 25-day moving average , Investors buy more put options compared to call options at a price that has not been seen since early 2018.

Renaissance Macro Research

Other market sentiment indicators also reach an extreme level. CNN's Fear & Greed index is at 89, indicating “extreme greed”. The index takes into account the relationship between the percentage of stocks that reach their 52-week highs and the percentage of stocks that also reach their 52-week lows B. the put-call rate, the demand for junk bonds , the demand for safe haven systems, market dynamics and market volatility.

Parag Thatte, investment strategist at Deutsche Bank, wrote in a Friday message to customers that the measures to position investors or the proportion of the investor portfolio that is held by shares were "very stretched".

"The positioning in stocks has increased and is now in the 96th percentile, with a large number of metrics being very stretched," he wrote. "Discretionary investors have continuously expanded their position since August and are significantly overweight in our reading. The exposure has been at its highest since October 2018. "

"The discretionary positioning generally closely follows the growth indicators, but has increased significantly since September, even if growth is not yet recovering," he added. "Active investment funds and private investors have increased their exposure after the strong market recovery."


It's hard to say when exactly this extreme positioning and investor optimism could trigger a stock downturn, but Mark Newton, technical analyst at Newton Advisors, suggests this could be the case this week. "The stock indices finally seem to have a point in time and time for corrections to start this week," he wrote to customers in a Monday note.

He pointed to the earnings season as a catalyst as investors sold large bank stocks, including JPMorgan Chase & Co,

JPM, + 0.40%.

Citigroup Inc,

C., + 1.20%

and Bank of America Corp.,

BAC, + 0.50%.

This will be announced this week, when one would normally expect investors to buy these stocks in order to expect a profit. the SPDR S & P Bank ETF

KBE, + 0.41%

has decreased by 1.6% since the beginning of the year.

Another could be the long-awaited US-China Phase 1 trade deal on Wednesday, which will give investors the difficult questions that still need to be resolved before the security of trade policy comes with a more comprehensive "Phase 1 deal" Market returns. "Deal," he wrote.

"The mood has generally become optimistic as the Investors Intelligence survey is now booming and many rumors of a phase 2 trade deal that has had no impact on the markets have been postponed until after the election," he wrote. “Looking back at the geopolitical tensions [between the U.S. and Iran] Zero effect on stocks shows to what extent the sentiment is so optimistic that things normally cause market concern, doesn't matter. "