The equity rally is a function of the collective acts of monetary authorities pushing investors into stocks. Ambrose Evans-Pritchard

Global equity melt-up in full swing even if investors hate themselves

There is no longer much doubt. We are in the midst of a late-cycle blow-off in global equity markets. 

Bank of America’s monthly survey of world fund-managers shows that investors have their second highest allocation to stock markets in thirteen years at 61pc. It is lead by shares in technology, energy, and even banks, and is stretched to a net 35pc overweight in Europe. “The summer 'melt-up' is likely to be followed by an autumn correction,” it said.

 Investors seem determined to keep dancing until the music actually stops, even though the largest majority since the height of the dotcom bubble think equities are overvalued. They are chasing momentum. It is irresistible to try to eke a little more out of the rally.

 This dovetails with warnings from the Bank for International Settlements that markets are now “euphoric”, with the fear gauge (volatility) almost switched off, and the Tobin's Q measure of the S&P 500 flashing more emphatic overvaluation warnings than in 2007. 

We are not necessary at the end of this surge. Cash holding are still very high at 4.5pc, so funds still have a little more money to throw at stocks. 

High cash levels are theoretically a contrarian buy signal, while anything under 3.5pc is a sell signal, but as you can see it was a counter-indicator in 2007. The proportion in cash peaked at the top of boom. It offered false comfort.

 So in a sense, the equity rally is a function of the collective acts of monetary authorities pushing investors into stocks. This of course is why the BIS is in despair. “Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” it said. 

Just wait until the Fed tightens in earnest.

DYI