SocGen: “Complacency” indicator implies market top

There’s no shortage of indicators out there, which claim to be able to forecast the beginning of the next bear market. Only few of these indicators have been proven to work on more than one occasion with any degree of accuracy, but that doesn’t stop investors and analysts clinging to these indicators in an attempt to try and time the markets.

One such indicator is a “complacency” index from Societe Generale. The index measures the daily number of Bloomberg articles containing the word “complacency” or “complacent”. This indicator reached a record high last month as equity markets swooned and bond yields continued on their relentless path lower.

socgen-complacency

Complacency typically refers to a disregard for dangers and risks but what are the key dangers and risks investors are facing at this moment in time? Societe Generale’s analysts believe there are two main risks overhanging markets currently, which investors need to be aware of but are failing to take into account when constructing investment strategies.

SocGen: “Complacency” indicator implies market top

Excluding Black Swan events, political uncertainty and economic/underlying profitability concerns are the two risks Societe Generale picks out as being the main concerns investors should focus their energy on trying to navigate in the current market.

Ultimately, SocGen’s analysts believe these concerns will bring an end to the current bull market, although it’s not expected that they will weigh on equity prices until mid-2017. Indeed, SocGen expects the current market rally to extend into next year and the bank’s analysts expect the global equity market peaked by mid-2017. Current jitters aside, there are some very real risks to the rally brewing in underlying company fundamentals. Many indicators suggest that the US economy is entering the last leg of the economic cycle, corporate profit margins are at all-time highs (excluding financials and energy) the quantity of corporate leverage is rising and M&A activity gain momentum. Another indicator to consider to consider is the US yield curve. Figures dating back to 1990 show that the US yield curve tends to be inverted before a bear market. In the US bond market, the two year and 10-year yield curve has been flattening since 2014, as the change in Fed policy has been absorbed by the long end of the curve. Historically, there has been some lag between initial curve inversion and the beginning of a bear market, which suggests there could be further upside to the S&P 500 in the near-term but the top is near.

 

"Complacency" indicator implies market top
“Complacency” indicator implies market top

"Complacency" indicator implies market top