Key indicators hint global stocks trading in overbought zone
, ET Bureau|
Jan 10, 2018, 08.25 AM IST
ET Intelligence Group: Several technical and fundamental indicators suggest that global equity valuations are turning frothy, prompting experts such as Jeremy Grantham to red-flag the irrational exuberance associated now with the asset class.
Grantham, who is the CIO at global fund management company GMO, and financial powerhouses Citigroup, Pacific Investment and Morgan Stanley have separately raised concerns over global equity valuations. Morgan Stanley said in its 2018 outlook note that the 8 1/2-year equity bull-run has reached its "euphoria" stage - usually the final lap in a rally.
The 14-day Relative Strength Index (RSI) — a measure of momentum — of the major global equity indices such as Dow Jones, Nikkei 225, MSCI World index and MSCI Emerging market show a reading of more than 70. Typically, an RSI reading more than 70 is construed as an overbought market by technical analysts. The Sensex RSI stood at 68.2.
Similarly, the percentage of stocks trading above the 100-day moving average (DMA) is north of 75 per cent for major global markets. According to Bloomberg, 93 per cent of the Sensex constituents are trading above 100 DMA. Finally, global equity volatility has plunged to the decade's low, bringing to the fore shortvolatility strategies.
The pick-up in short volatility products means traders are betting on no major upswing in volatility in the short-term. BoFMerrill Lynch GFSI skew indicator—a gauge of relative demand against large swings in major global equities—dropped to the lowest in the last four years.
On the fundamental side, the valuation of the MSCI World index, based on the 2018 earnings, reached 16.74, the highest level in the last one decade and just few percentage points away from two standard deviations from the mean.
Analysts are raising the estimated projected earnings for US companies at the fastest pace in 10 years, according to the Bespoke Investment group. The gap between those projecting higher earnings and those trimming estimates was as wide as it now is back only in 2010.
Grantham, who has successfully predicted several asset bubbles in the past and is known for his mean-reversion theory, said in a note that the markets are currently showing signs of entering the blow-off or melt-up phase of this very long bull market. He called the current bull market as one of the highest-priced in history.
Grantham, who is the CIO at global fund management company GMO, and financial powerhouses Citigroup, Pacific Investment and Morgan Stanley have separately raised concerns over global equity valuations. Morgan Stanley said in its 2018 outlook note that the 8 1/2-year equity bull-run has reached its "euphoria" stage - usually the final lap in a rally.
The 14-day Relative Strength Index (RSI) — a measure of momentum — of the major global equity indices such as Dow Jones, Nikkei 225, MSCI World index and MSCI Emerging market show a reading of more than 70. Typically, an RSI reading more than 70 is construed as an overbought market by technical analysts. The Sensex RSI stood at 68.2.
Similarly, the percentage of stocks trading above the 100-day moving average (DMA) is north of 75 per cent for major global markets. According to Bloomberg, 93 per cent of the Sensex constituents are trading above 100 DMA. Finally, global equity volatility has plunged to the decade's low, bringing to the fore shortvolatility strategies.
The pick-up in short volatility products means traders are betting on no major upswing in volatility in the short-term. BoFMerrill Lynch GFSI skew indicator—a gauge of relative demand against large swings in major global equities—dropped to the lowest in the last four years.
On the fundamental side, the valuation of the MSCI World index, based on the 2018 earnings, reached 16.74, the highest level in the last one decade and just few percentage points away from two standard deviations from the mean.
Analysts are raising the estimated projected earnings for US companies at the fastest pace in 10 years, according to the Bespoke Investment group. The gap between those projecting higher earnings and those trimming estimates was as wide as it now is back only in 2010.
Grantham, who has successfully predicted several asset bubbles in the past and is known for his mean-reversion theory, said in a note that the markets are currently showing signs of entering the blow-off or melt-up phase of this very long bull market. He called the current bull market as one of the highest-priced in history.
