It’s a full house at Morgan Stanley, with the bank’s three key indicators all flagging up sell signals as of Tuesday. ‘Fundamentals’, on the back of higher bond yields and higher ISM new orders, has come into line with the existing sell signals from the ‘Valuation’ and ‘Risk’ indicators.
That across the board has occurred only five times since 1980. Equities have always been down in the following six months, by on average 15 per cent (see below). Previous occasions include September 1987 and April 2002.
“We prefer to be on the right side of those odds,” the bank notes in a report. Morgan Stanley admits that its calls have thus far proved too cautious, with markets up 7 per cent since the bank went neutral for equities.
One explanation for that is that “arguably the wall of worry is still being climbed.”
What may distinguish this bull-run from previous gung-ho, invincible rallies is that the market remains worried. Normally when the bank’s valuation indicator says , sentiment is optimistic. This time, the futures market indicates caution.
“Our indicators are suggesting an equity market correction and we are expecting one,” the bank adds. “The correction may only happen when sentiment turns outright bullish.”
Previous full house sell signals, next 6 months performance
Apr 1981 -10.8%
Sep 1987 -25.2%
Feb 1990 -6.8%
May 1992 -7.0%
Apr 2002 -26.2%