The recent rally in stock markets is facing challenges as nearly four out of five industry sectors are now at or near overbought levels, according to strategists at Citi. This echoes the market sentiment index from Morgan Stanley, which has turned negative.
A Rally Showing Hints of Fragility
The significant surge in stock prices since October has hit a roadblock, as evidenced by the S&P 500’s largest one-day decline in three months on Wednesday.
Impressive Gains but Potential Concerns
Although the S&P 500 has experienced a remarkable 22% increase this year, with the Dow Jones Industrial Average up 12% and the Nasdaq Composite soaring by 41%, cautionary signs are emerging.
Citi’s Sector Analysis
Citi’s quarterly sector and industry group navigator, led by strategists under Scott Chronert, reveals that 19 out of 24 industry groups are either at or close to being overbought. This is a significant shift from the previous quarter when the majority were oversold.
The Citi team explains that the rally since late October was primarily influenced by lower interest rate expectations. Therefore, they suggest that pullbacks should be anticipated and taken advantage of.
Morgan Stanley’s Market Sentiment Indicator
Morgan Stanley’s market sentiment indicator has now turned negative after remaining neutral since December 12th. This indicator combines survey, positioning, volatility, and momentum data to assess market conditions. When it indicates negativity, below-average one-week returns are expected.
Momentum and positioning indicators, such as the MSCI all-country world index’s comparison of 52-week highs and lows, as well as the CFTC data on S&P 500 net positions, are also showing less positive signals.
The strategists led by Serena Tang at Morgan Stanley explain that with overall sentiment currently “stretched but reversing,” the market sentiment indicator has transitioned into a negative regime.
It is worth noting that the Morgan Stanley indicator had turned positive in October, foreshadowing the subsequent rally.