It has been one of the most staggering stock market rallies in the history of Wall Street. Coming out of the ashes of the market meltdown, which was a byproduct of the mortgage-related disaster that began over 10 years ago, and culminating with a plunge into the abyss of massive selling in March of 2009.
The S&P 500 hit a stunning intra-day low of a rather chilling 666 on Friday afternoon March 6, 2009, and ever since then it has been on one of the most spectacular runs ever. While there were some notable pullbacks along the way, the most significant in the fall of 2011 and to start the year in 2016, for the most part it has been a nonstop moonshot, one that look like it could be close to the end.
Needless to say, along the way there have been a plethora of naysayers, as there always are, but increasingly the data and the market response are looking more and more like a solid correction could be headed our way, which to be frank may be a very good thing. Multiples for almost all sectors are sitting at all-time highs. Here are just a few of the many swords of Damocles that are hanging over the stock market currently. These were noted in a recent research report from Jefferies.
1. This is the first 12-month period in the history of the S&P 500 without a 3% drawdown. (Source: Bespoke)
2. The CBOE Volatility Index is also the lowest on record, using a rolling 12-month average. The VIX is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange. (Source: Bespoke)
3. At Last Friday’s close, the S&P 500 was down 0.46% from an all-time high. That was enough to drive the VIX up to a two-month high. It has jumped again this week.
4) The CBOE put/call ratio has reached its highest daily reading since March 2017. (Source: @McClellanOsc)
Jefferies isn’t the only firm on Wall Street that sees some treacherous waters ahead for the market. Michael Hartnett, the outstanding chief investment strategist at Merrill Lynch was also just out with a new report that cited some of the froth in the market, especially in the FAANG stocks, which include Facebook, Amazon.com, Apple, Netflix and Alphabet (Google).
Hartnett also noted other specifics that are furthering the Merrill Lynch view that we could be in for a serious correction this winter following some sort of tax reform package agreed upon by Congress. That in of itself could be a long-shot in the view of many on Wall Street.
Citing data from surveys of fund managers, or what is known in the industry as FMS, the Merrill Lynch report shows evidence that there are crowded trades, and a consensus of opinion that may be the kind of herd mentality that can lead to a steep sell-off. Here are just a few of the examples from the report.
1. All-time high “Goldilocks” expectations (not too hot, not too cold, just right), wherein 56% of those surveyed see high growth with low inflation.
2. Bearish viewpoints of secular stagnation are dropping dramatically.
3. FMS cash levels are at just 4.4%, down from 4.7%, which is the lowest since October of 2013.
4. FMS hedge fund exposure is at an 11-year high.
5. Numerous “crowded” trades: Long the Nasdaq, short volatility, long credit.
6. FMS data shows the highest global equity overweighting since April of 2015. That includes the highest Japan overweight position in years. This is in tow with a huge underweight in United Kingdom assets.