Are retail investors signaling we are close to euphoria?

The first week of the year started and finished on a positive note as global equity markets closed on Friday night at new record levels. Goldilocks appears to be alive and well. This was despite slightly disappointing jobs and service PMI data from the world’s largest economy. The oil price continues to be supported as America freezes. Signs that the UK economy may be performing better than economists forecast continued as workers hourly productivity jumped at the fastest rate for six years during the third quarter of the past year.

The other big story of the week that equity markets have taken in their stride, rightly or wrongly, was Intel’s announcement that there are security flaws that may put billions of people’s data at risk of being hacked. The share price lost about 7% at one point in the week, however regained at least half of that loss by the end of the week. This news did not also stop the Nasdaq index continuing to climb higher by another 2.5%.

The best performing sectors on the week were those most correlated to a return in inflation, oil materials, and consumer discretionary. The worst performers, those sectors that traditionally do poorly if investors believe inflation is back on the horizon, Utilities and Telco’s.

Possibly the first big test for markets will come this week as the Banks sector kicks of the fourth quarter earnings season. On Friday JP Morgan and Wells Fargo report, the rest in the following week. Banks earnings will be even more complicated than usual to analyse as the effects of the tax changes are accounted for. Goldman’s, for example, have already announced they will take a 5 billion dollar hit on taxes paid on the money it plans to repatriate. Other data towards the end of the week that may influence Goldilocks’ porridge, December inflation and retail sales for the US economy. As for the UK economy we get the latest industrial and manufacturing data for November.

John Authers in Saturday’s Financial Times questions whether we are reaching the point of euphoria, that signals a point of correction. His final line is that we should start planning for the moment this rally ends. One of the possible reasons, one feels this bull market has continued to gain legs in the past few years has been investors have been constantly prepared for the exit door. Retail investors are often thought by the professionals to be the last to join the party. Looking at the gap between the bears and the bulls in the latest AAII sentiment survey. The spread is the most bullish it has been for over 5 years.

Posted on January 7, 2018 .