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The very fact that everything is doing well should make you nervous. Morgan Stanley’s Graham Secker issues a warning today:Investors are optimistic across all major asset classes…
Equities, bonds, gold and oil all rose in value in January. This is a rare occurrence and in recent years has tended to be a good sell signal for stocks.
…and this has been a very reliable sell signal
CFTC data shows that there are currently net speculative long positions in the Nasdaq, US treasuries and oil. Since 1999 the average 6m performance of MSCI Europe post such an occurrence is -6.6% and the probability of a rising market is just 19%.
The coming pullback may require an economic catalyst, which Secker says coiuld be right around the corner:
Expect less supportive macro news flow
Although we have yet to detect any clear signs of a peak/roll-over in the economic lead indicators that we track, our economists’ GDP forecasts for both the US and Europe imply that the probability of further meaningful upside in these measures is reasonably low. While it is hard to make the case for a material disappointment in forthcoming macro news flow in the short term, it is considerably easier to argue that macro news flow will turn ‘less good’ going forward as the initial euphoria from ECB intervention starts to recede. We believe the market is already discounting further upside in lead indicators such as the ISM, as we show in Exhibit 8.
While waiting for a pullback, Morgan Stanley recommends focusing on individual stocks.