‘Sell’ signal inches forward as stock market froth rises

Sentiment was getting even closer to triggering a “sell” signal in the stock markets last week, as investors’ enthusiasm climbed even more.

Four-week inflows into equities were the largest ever, at $58 billion, according to analysis by Bank of America Merrill Lynch. At the same time, inflation fears are beginning to seriously show, with inflows into Treasury Inflation Protected Security (TIPS) funds hitting a record.

The analysts warned that the market may be flying on the “wings of Icarus”. The investors’ conviction in fresh upside to stocks is driven by interest rates that are still very low, and by hopes of strong earnings growth and an expanding economy.

The answers in the Bank of America Merrill Lynch macroeconomic surveys are consistent with real growth between 5% and 6% for US GDP, and with 20% growth in earnings per share for American companies from here on.

Threats like the US government shutdown, President Trump’s renegotiation of NAFTA, the US trade war with China, as well as rising oil prices are just “noise” for now, at least judging by the flows of capital.

The Bull/Bear indicator takes another step towards the “sell” signal, reaching 7.4 from 7.1 in the week before.

Bear Bull Indicator

Bear Bull Indicator

Its components’ trends are unchanged from the prior week: hedge fund positioning and credit market technicals are very bullish, equity flows, market breadth and long only positioning are bullish, with just bond flows in bearish territory.

Looking strictly at last week, it was the 56th straight week of inflows for investment grade bond flows, which received another $3 billion. By contrast, high-yield bond funds saw redemptions worth around $2.5 billion.

Emerging market debt had another strong week, with $3.3 billion worth of inflows, while TIPS funds saw a record inflow of $1.5 billion.

In equities, US stocks saw $6.4 billion going in, with hopes that the tax cuts will stimulate the economy beating worries over political tension and the US government shutdown.

Japanese equities saw strong inflows worth $3.6 billion, emerging market stocks saw $3.5 billion going in, and European stocks received $2.2 billion.

By sector, financial, technology, energy and the consumer sector saw inflows, while materials, healthcare, utilities and real estate saw money pouring out. It looks like investors hope the business cycle will last a bit longer.