US stocks have had a rip-roaring start to 2018, continuing the momentum seen in 2017.
The S&P 500 Index has already added 5.1% this year, closing at the highest level on record on Friday.
However, to Citibank’s global macro strategy team, there’s more than a few indicators out there that suggest stocks may have run just a little too hard, too fast recently.
“We have highlighted several tactical indicators making us worry about the strong risk rally in the new year including RSIs, the Panic-Euphoria model, stretched retail sentiment, very positive analyst earnings revisions and very low pairwise correlations within equity indices,” the bank says.
It says there’s another reason to be cautious about the near-term outlook for stocks, pointing out that while they continue to rally, high-yield corporate bond spreads have widened slightly while implied equity volatility have also increased.
“The latter is odd and usually only occurs in an equity market dip, at least a small one, and not a rally,” Citi says.
“As such, we are monitoring the moves in credit and equity vol as another potentially
bearish tactical signal for stocks.”
This chart shows the S&P 500 Index against high-yield US corporate credit spreads.
And this next chart shows the lift in VIX Index, also overlaid against the S&P 500.