CREDIT SUISSE: Here are the 'danger signals' for a stock market top that we're watching

The global equity strategy team at Credit Suisse thinks the bull market in stocks is not yet over. But that’s not stopping them from contemplating what the end would look like.

Andrew Garthwaite and his team raised their year-end forecast on the S&P 500 to 2,500 from 2,300, since the index already passed their old forecast. They remain bullish because earnings momentum is picking up, stocks look cheap relative to bonds, and the labour market probably has more spare capacity than they thought, among other reasons.

However, there are a few signs that the bull run is getting weary:

  • Cyclical stocks, which tend to track the economic cycle and include consumer discretionary names, are underperforming the broader market. This trend has been associated with a correction in equities about 73% of the time on a three-month basis, Garthwaite said.
  • Investor sentiment is at a peak level. The gap between investors who say they are bullish and those who are bearish has risen to a level associated with previous market tops.
  • Corporate buybacks are slowing. They have been the biggest source of demand for stocks since 2012 according to Credit Suisse.
  • Oil prices are sliding again and could be a drag on the S&P 500.

“None of these factors are sufficient to cause us to forecast a correction,” Garthwaite wrote. “This is partly because the composite sentiment indicators are not extended; because we believe that the oil price would recover (the house view is $US62 per barrel by end 2017); and partly because FCF after dividends and buybacks is still positive allowing the corporate debt/buybacks merry-go-round to continue (though it does focus even more attention tactically on the behaviour of credit spreads).”

The table below shows the factors that would indicate to Garthwaite that the bull market is peaking. The most alarming score is three, and the least dangerous is zero.

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