The blistering asset rally of 2012 has run ahead of economic realities in Europe, America and China. It is exhibiting symptoms of a schizophrenic market, with technical indicators flashing signs of exhaustion.
By Ambrose Evans-Pritchard
10:00PM GMT 07 Mar 2012
Graham Secker from Morgan Stanley said it is rare for global stocks, oil prices and government bonds to rise in lockstep, and such exuberance becomes a "very reliable sell signal for stocks" once speculators join the party.
Equity long positions on NASDAQ have reached 1.5 standard deviations and long bets on oil are at an extreme of 1.9, according to data from the Commodity Futures Exchange Commission. This is occurring at a time when yields on 10-year US Treasuries are still at 1.96pc, signalling depression, deflation, or both.
The historical relationship between bonds and equities has completely broken down over the past six months. "You can't have a sustained period where equities are going up, while bond yields are flat or trending down," said Mr Secker.
One or the other must give, and bears have no doubt which it will be. Fund manager John Hussman said the market is replicating the "extreme" conditions seen at danger moments in 1972-1973, 1987 and 2007-2008. His warning indicators include a rise in the S&P 500 index by more than 8pc above its 52-week moving average, a "Shiller price/earnings ratio" above 18, and bearish sentiment below 27pc.
America's Economic Cycle Research Institute (ECRI) said its black box shows "pronounced, persistent and pervasive" signs that the US economy is sliding back into recession.
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