As market bubbles keep inflating, signal gets close to ‘sell’

Investors’ optimism remained at very high levels, despite the beginning of tapering of quantitative easing by the European Central Bank (ECB), tensions with North Korea and the Catalan crisis.

Looking at the latest capital flows data gives an idea about the magnitude of enthusiasm out there. Equities took in another $8.9 billion in the past week, according to a report by Bank of America Merrill Lynch.

This was made of an inflow of $9.7 billion into ETFs and an outflow of $800 million from mutual funds. Equities have seen inflows in 18 of the past 20 weeks.

By region, the US saw its second week of sizeable inflows ($6.1 billion), with investors most likely encouraged by renewed talk about tax cuts from the Trump administration.

Around $500 million went into European equities, which saw inflows in 14 of the past 16 weeks. This despite the Catalonia crisis and the election of populists in Austria and the Czech Republic. That’s naming just three of the latest challenges, not to mention the ongoing Brexit disaster.

Emerging markets saw their first outflows in 10 weeks, with investors withdrawing $700 million, while Japan also saw $1.1 billion going out.

In fixed income, investment grade bond funds were still preferred, despite major central banks turning down the easy money tap, ever so slightly. This asset class has seen 44 straight weeks of inflows, and last week it took in another $5 billion.

High-yield bond funds saw $200 million going in, and emerging market debt funds, which have seen inflows in 39 of the past 40 weeks, received another $200 million.

There are “forever flowing bubbles” in corporate bonds and equities, according to the analysts at Bank of America Merrill Lynch. This year, the pace of inflows into corporate bonds and stocks has been accelerating; 2017 is on course for a record year for inflows into risky assets.

The BofAML Bull & Bear indicator is closing in on a “sell” signal, having recorded 7.6 last week.

The Bear/Bull indicator

The Bear/Bull indicator is getting close to a “sell” signal.

Three of its components were very bullish: hedge fund positioning, credit market technicals and equity market breadth. Two components — equity flows and bond flows — were bullish. The only bearish component was long-only positioning. A sign of things to come?