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5 Red Flags Emerge With Record-High Stocks Brushing Aside Political Turmoil

5 Red Flags Emerge With Record-High Stocks Brushing Aside Political Turmoil
(Getty)

Wednesday, 08 January 2020 02:53 PM

President Donald Trump toned down rhetoric against Iran, fueling a rally in American stocks that took major benchmarks to fresh records.

The rebound from an overnight rout that topped 1.5% has some investors breathing a sigh of relief, but another cohort point to mounting signs that the comeback is a sign of complacency among bulls.

“This is a market looking through fundamental data, looking through corporate guidance and data points, looking through Fed guidance itself,” Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, told Bloomberg Television. “It is a market that wants to go up in the short term. That is what makes it so profoundly dangerous.”

Below are five charts that urge caution:

Who Needs Hedging?

As the world awaited Iran’s response to Friday’s U.S. killing of a top general, equity traders showed little inclination to hedge against losses. The cost of a bearish put option versus that of a call continued to slide, recently touching levels that have been rare throughout the bull market, Cboe data show.

Breadth Surge

The latest surge has taken 82% of S&P 500 firms above their average price for the past 200 days, the highest percentage in two years. Such strong market breadth, where gains are not concentrated in a few heavyweights, is generally a sign that a rally has room to run. But Frank Cappelleri, a senior equity trader and market technician at Instinet in New York, says the current reading is a “frothy indicator we need to watch.”

According to Cappelleri, the last time so many firms topped the key level, the benchmark fell into a correction not long after. “Eventually, many stocks will slip back below their long-term moving averages -- like they always do,” Cappelleri wrote to clients Wednesday.

Shorts Evaporate

After last year’s historic run, investors continue to expect further gains. Short sales in the SPDR S&P 500 ETF Trust, known by its ticker SPY, as a percentage of shares outstanding fell to 1.1% Tuesday, according to data from IHS Markit Ltd. That’s the lowest level since January 2018, before the event known as “Volmageddon” sent stocks swooning.

Leveraged Love

Exchange-traded fund investors are going all in, rushing for some of the riskiest products out there that bet stocks will keep on rising. Jason Goepfert, the president of Sundial Capital Research, tracks assets in popular leveraged long products (ProShares Ultra S&P 500 ETF and ProShares Ultra QQQ, for example) compared to their counterparts that bet on a decline. Over the past month, assets in leveraged long ETFs have gained more than 15%, while the short products have lost more than 10%, his data show.

“This is another concern for stocks here, as leveraged traders have become far too comfortable,” Goepfert wrote to clients.

Technical Signs

One particular technical indicator is now flashing “sell.” The GTI Vera Convergence Divergence Indicator, which measures momentum shifts upwards and downwards, received a new bearish signal late last week, and warning continues to flash.

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President Donald Trump toned down rhetoric against Iran, fueling a rally in American stocks that took major benchmarks to fresh records.
red, flags, investors, political, turmoil
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2020-53-08
Wednesday, 08 January 2020 02:53 PM
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