The Tell: By one measure, stock-market euphoria just hit a 6-year high — and that is bad news
If bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria, as famed investor John Templeton once said, then recent research from Bank of America Merrill Lynch offers cause for concern.
Optimism reached its highest level on Wall Street since 2011 in June, according to strategists at BofA Merrill Lynch, including equity and quantitative strategists Savita Subramanian and Dan Suzuki. The bank’s so-called sell-side indicator, which BAML says has been a reliable contrarian indicator, hit 56.4, rising 2.4 percentage points, and perhaps signaling that the bull market in U.S. stocks that is in its ninth year may be on its last legs (see chart below):
Here’s how BofA put it: “The recent inflection from skepticism to optimism could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle.”
Of course, the firm isn’t the only research shop advising investors to brace for an unraveling in the unrelenting upward trend in equities, which on Monday saw the Dow Jones Industrial Average DJIA, +0.61% flirt with an all-time trading high, while the Dow Jones Transportation Average DJT, +0.79% and small-cap-focused Russell 2000 index RUT, +0.80% closed at records. Market technician Tom McClellan also said recent moves in government bonds, notably the spread between the 10-year Treasury TMUBMUSD10Y, +0.00% and comparable German paper TMBMKDE-10Y, +0.00% has narrowed, and that has tended to bode ill for stock-market rallies that have grown long in the tooth.
So far, weakness in technology stocks has weighed on the tech-laden Nasdaq Composite Index COMP, -0.49% and the broad-market S&P 500 index SPX, +0.23% , where tech stocks hold the largest market-capitalization weighting at 22%. The tech sector has been among the biggest factors helping to drive benchmarks to new heights, until recently sputtering.
Wobbles in tech have been somewhat masked by recent gains in energy XLE, +1.93% and financials XLF, +1.46% but if those sectors also prove treacherous, investors may be looking at trouble.
Of course, the graveyard of investing is littered with those who have challenged the vitality of this current bull market.
Check out: Opinion: Bull market in stocks will top out in 2018, says investor who studies crowd psychology