U.S. Stocks: Positioning, Valuations and Technical Signals Look Stretched Ahead of Fed Meeting




 

Investors are mainly focusing on the Fed meeting that will take place later today. They will keep an eye on Fed statement (including guidance), a refresh of economic forecasts and dots (14.00 EST time) but also on Powell press conference (14.30 EST time). Earlier this week, Bloomberg discussed the potential for the Fed to disappoint at today’s meeting by not tweaking its bond-buying program (toward longer maturities). Such a move could send the yield on 10-year Treasuries above 1% for the first time since March and could have large implications on U.S. stocks especially in a context where positioning, valuations and technical signals are stretched.

 

Focusing on positioning, BofA highlights that its December Global Fund Manager Survey revealed that optimism on “risk-on” assets (equities and commodities) has seen a significant increase to a net 69%, the highest since February 2011. In addition, money managers overseeing $534 billion in total, are underweight cash for the first time since May 2013, with levels down to 4%.
 

 

In the meantime, most of reports confirm that both hedge funds and retailers are almost all-in. Bloomberg data showed that the total equity and index call options (average daily volume for the past 20 days) almost reached 22.5 million as of Monday.
 

 

Large inflows coming from all kind of investors pushed U.S. stocks to all-time high, raising questions about sustainability of valuations.

 

 

Of course, the current level can be partly explained by a very accommodative monetary policy worldwide which led to the loosest financial conditions on record.
 

 

Meanwhile, technical analysis also point to excess and overbought conditions. According to Jean-Charles Gand, Chief Technical Analyst at Market Securities, 92% of S&P 500 stocks are above their 200-DMAs, illustrating a strong breadth. However, a bearish divergence signals a potential reversal point because directional momentum does not confirm price. A bearish divergence forms when the price records a higher high and RSI forms a lower high.

 

 

All in all, investors have to be particularly cautious tonight with most of them positioned for another favorable outcome.

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