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%.
Bank of America Flags Sell Signal for Stocks as Investors Rush Out of Cash – Bloomberg
*Link: https://t.co/nofjzy6MZ9 pic.twitter.com/eLp7bUTZTX— Christophe Barraud (@C_Barraud) December 15, 2020
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.
Retail investors are way over their skis here and leaning too far into options. Historically that doesn’t end well. The hedge funds are also suffering from FOMO and continue to increase long exposure. pic.twitter.com/MmvV6dhRbd
— Scott Maragioglio, CMT (@smaragio) December 14, 2020
The total equity and index call options (average daily volume for the past 20 days) almost reached 22.5 million as of Monday – Bloomberg data pic.twitter.com/iu864MPgQV
— Christophe Barraud (@C_Barraud) December 16, 2020
Large inflows coming from all kind of investors pushed U.S. stocks to all-time high, raising questions about sustainability of valuations.
#SPX | The S&P 500 Index closed Thursday at 26 times earnings, using a gauge that takes estimates for the longer time period into account (24 months) – Bloomberg pic.twitter.com/ZvgOBEbyig
— Christophe Barraud (@C_Barraud) December 11, 2020
S&P 500 valuations are two standard deviations above the 30-year average. I'll just leave this here. pic.twitter.com/UVG2FbLGPw
— David Ingles (@DavidInglesTV) December 16, 2020
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.
#BOC #BOE #BOJ #ECB #FED | Latest data confirmed #G7 CBs combined balance sheet (BS) kept climbing in November.
*#G7 CBs combined BS has grown by more than $8T since February. pic.twitter.com/GRP1oI5ZFx— Christophe Barraud (@C_Barraud) December 3, 2020
Financial conditions remain very accommodative (near loosest on record) – Bloomberg TV Chart pic.twitter.com/twUl3u1Lin
— Christophe Barraud (@C_Barraud) December 16, 2020
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.
#SP500 | 92% of S&P 500 stocks are above their 200-DMAs (strong breadth). However, a bearish divergence signals a potential reversal point (directional momentum does not confirm price). A bearish divergence forms when the price records a higher high and RSI forms a lower high. pic.twitter.com/djB3aLGMog
— Jean-Charles GAND (@jeancharlesgand) December 16, 2020
#SPX | The proportion of S&P 500 stocks above their 200-day moving average recently hit a 7-year high – Bloomberg TV chart pic.twitter.com/8URLietVyl
— Christophe Barraud (@C_Barraud) December 16, 2020
All in all, investors have to be particularly cautious tonight with most of them positioned for another favorable outcome.