“Admittedly, better hiring intentions are encouraging. Plus stock buyback activity has stepped up…with a 1,975 S&P 500 (INDEXSP:.INX) target by year-end 2014 as economic conditions improve this year, we remain generally constructive longer term while continuing to advise nearer-term tactical caution,” say Citi analysts Tobias Levkovich, Lorraine Schmitt and Christina Wood in their latest PULSE snapshot of US equities.

Caution could well be the operative word in the above statement.

With equity indices, as well as sentiment, at record highs, we note that bond funds at last reported a positive flow. Could this be the first leaf to fall?

Liquidity (the L of P-U-L-S-E) – bond funds breathe easier

ICI report that bond fund flows in the latest week ended January 8, 2014 were as follows ($M):

11/12/13

18/12/13

23/12/13

31/12/13

08/01/14

Total Equity

-1,203

171

2,466

6,198

-647

Domestic

-4,525

-2,814

952

3,499

-3,362

World

3,322

2,985

1,514

2,699

2,716

Hybrid

864

441

827

1,082

880

Total Bond

-6,874

-8,090

-3,464

-2,812

2,647

Taxable

-4,299

-5,568

-2,064

-440

2,994

Municipal

-2,575

-2,522

-1,400

-2,372

-347

Total

-7,213

-7,477

-172

4,467

2,881

The Citi analysts observe that on a net basis investors took out $647M from equity funds – foreign funds gained $2.72B while US funds saw outflows of $3.36B.

1-equity-flows Bond Fund

But what is significant is that bond funds saw inflows of $2.65B after 13 straight weeks in which investors kept pulling out money. Could this herald a turn of the tide? Investors may be seeking the safety of bonds after the sharp rise in equities during the past year.

Unanticipated (the ‘U’)

Indeed, Citi also say that “EPS disappointments may create volatility,” and Economic/Earnings Disappointment figure in its list of unanticipated events that could have a negative market impact.

However, the trend, so far, is for upward earnings revisions to trend higher to 44.6% from 44.4% in December.

Euphoria unabated

Citi’s Panic/Euphoria Model continued to red-line into the Euphoria territory for this week too, though it was a tad lower at 0.63 compared to last week’s 0.64 (revised). “Our Cyclical Expectations Model (CEM) pulled back this week; a retreat from its recent peak signals short-term caution for the market,” say Citi.

2-sentiment-models Bond Fund

Overall, this week’s PULSE report from Citi strikes a wary note on the state of US equities, though they are still “modestly undervalued based on a variety of metrics.”