Narrowing equity market breadth may signal a “market top” -BofA

An image illustration reveals U.S. 100-dollar financial institution notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao/File Picture

LONDON, Dec 3 (Reuters) – Narrowing fairness market breadth, rising volatility and the prospects of charge hikes are the basic indicators of a market high, BofA mentioned in a weekly report on Thursday.

Simply 5 of the largest U.S. know-how shares accounted for 71% of the almost 20% good points in U.S shares, BoFA analysts famous of the efficiency of shares in a weekly flows notice primarily based on EPFR knowledge.

A state of affairs wherein a tiny group of shares powers good points whereas others lose floor is usually seen as an indicator {that a} rally is operating out of steam.

The image was equally worrying for world shares, with year-to-date returns from a world index excluding the highest 300 U.S. development shares at a paltry 1.6% regardless of a record-breaking $1 trillion of fairness market inflows to date this yr.

Volatility gauges are additionally signalling warning. Whereas U.S (.VIX) and European inventory market volatility gauges (.V2TX) have stepped again from 2021 highs hit earlier this week, they continue to be far above latest averages.

And with main central banks led by the U.S. Federal Reserve anticipated to start out growing rates of interest from subsequent yr, merchants are getting fearful about know-how shares. Their stellar efficiency this yr has been partially primarily based on the view that rates of interest will stay close to file lows.

“Hikes plus volatility plus divergences usually a market high make,” strategists at U.S. funding financial institution BofA led by Michael Hartnett mentioned in a notice.

U.S. Treasuries noticed their greatest inflows since October 2020 whereas investment-grade and high-yield bond funds noticed massive outflows. Money funds noticed the largest weekly inflows at $27.1 billion, adopted by equities at $9 billion.

Quick bonds and lengthy equities trades this yr have paid good-looking dividends. However in an indication that traders are unwinding a few of these trades, BofA mentioned its non-public shoppers have trimmed their fairness positions for the previous three weeks, led by outflows from development and industrial sectors.

Reporting by Saikat Chatterjee; Enhancing by Rachel Armstrong and Catherine Evans

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