UBS sees a high likelihood of a minor correction in global equities as their tactical indicators are currently “extreme”.
The investment bank said these tactical indicators are currently at levels where the market typically falls moderately.
“Tactical indicators consist of: i) Positions in the top decile of their range, ii) Sentiment expressed by the bull/bear ratio and call put option premiums is abnormally optimistic; and iii) The intra-index correlation – a sign of complacency – is abnormally low (which itself is a signal of caution in backtesting),” the firm explained.
They added: “Additionally, the price action is 9% above the 6-month moving average – again, this is extreme and at levels where the market falls 60% of the time.”
The most overbought sectors tend to be long-term growth rates, with UBS saying the catalyst is either tighter inflation or optimism for peak GDP growth.
Meanwhile, the most vulnerable areas are those that are most overbought. In Europe these are construction materials and means of production. In the US, processed foods and building materials are “very overbought” and food producers are “abnormally oversold”, UBS added.
Despite the extremes, the bank said it did not consider this a major correction.