As US stocks retreat from all-time highs, Citigroup says a market risk indicator has hit its highest level since the 2008 financial crisis, but investors need not exit the market for now.
Major Warning
A team of Citigroup strategists led by Beata Manthey told clients on Friday that their bear market warning list has triggered 10 of 18 indicators globally and 11.5 in the US market; the current number of warnings is the highest since the global financial crisis.
However, compared with data before previous bear markets, the current warning intensity is relatively mild: ahead of the dot-com bubble burst in 2000, 17.5 indicators were triggered, and before the financial crisis, 13 were triggered. Therefore, the strategists judge that the market has not yet shown signs of "excessive frenzy," and while being vigilant about rising risks, they remain bullish on the stock market's outlook.
Citigroup's warning list monitors dimensions including stock valuations, market sentiment, credit spreads, yield curves, fund flows, corporate fundamentals, and financing activities. The strategists emphasize that this indicator cannot precisely time market pullbacks or predict their start and end points; it is mainly used to assist investment decisions during market declines and to remind investors when to increase risk aversion.
The team wrote in the report: "However, we note that once the warning indicator enters a double-digit trigger zone, historical data show that subsequent warning signals tend to accelerate, meaning market risks could escalate quickly. If more warnings continue to appear, then it will no longer be suitable to buy the dip during market corrections."
Dragged down by Broadcom's disappointing earnings, the market's enthusiasm for tech stocks has cooled somewhat, ending the S&P 500's nine-week winning streak. According to Dow Jones Market Data, the S&P 500 has hit 24 record closing highs this year, with the latest on Tuesday, June 2.
Among the currently triggered warning signals, stock valuations in many sectors are clearly overstretched, and investor sentiment remains overly optimistic. Other warning signs are also heating up: capital expenditure growth is rising, driven by large AI cloud service providers; IPO and equity financing volumes are recovering, reflecting high risk appetite.
"The US Treasury yield curve has gradually flattened this year, but key indicators such as credit spreads remain low, sending a relatively positive market signal. If risks in the private credit market materialize or the debt scale related to AI capital expenditure expands significantly, these positive indicators could turn negative." Overall, Citigroup believes there is no signal of a near-term sharp decline in stocks. "Looking at history, major market tops are rarely triggered by a single negative factor; they usually occur only when multiple indicators simultaneously enter extreme overheating territory."
Short-term Risks
Options market analysis firm SpotGamma issued a warning, noting that several major events in the next two weeks pose a threat to the current one-sided bullish sentiment. "June is packed with key events, and we are closely watching for the next surge in volatility."
First, the US May Consumer Price Index (CPI) will be released on June 10. Affected by the Iran situation, energy prices have risen sharply, making inflation a core focus for investors again.
On June 12, SpaceX will launch its initial public offering (IPO). "The Russell Index recently revised its rules to allow SpaceX to be included in the index at least five trading days after its IPO," SpotGamma added. "Other major indices are likely to make similar adjustments later. The inclusion of this $1.8 trillion company could further exacerbate market volatility."
First Financial reporters noted that similar concerns are not uncommon on Wall Street. Bob Elliott, co-founder and CEO of asset management firm Unlimited, said that future waves of mega IPOs could "siphon funds from financial markets." Joe Mazzola, head of trading and derivatives strategy at Charles Schwab, said: "I think demand for SpaceX and other large IPOs this year is very strong." He cautioned that some investors may sell high-flying stocks to participate in these new issues.
Then on June 17, the Federal Reserve will announce its first policy decision under new Chairman Kevin Warsh. The next day (Thursday) will be June options expiration — due to the Juneteenth holiday, the expiration is moved from the usual Friday to Thursday, when over $5 trillion in four types of contracts — single-stock options, index options, stock index futures, and single-stock futures — will expire simultaneously, often increasing market volatility.
In a recent report, research firm McMillan Analysis wrote that major indices, including the S&P 500, have entered extreme overbought territory, but the bull market trend has not broken. Corrections are normal in overbought conditions, and confirmatory sell signals may emerge in the short term, but have not yet materialized.
The firm noted that the put/call ratio for all stocks continues to decline: call option volume far exceeds puts, with the indicator deep in overbought territory but still providing a bullish signal; only a reversal upward would trigger a sell warning for the broader market. Meanwhile, market breadth has weakened, and the breadth oscillator is close to turning negative; on June 3, the number of new 52-week lows on the NYSE slightly exceeded new highs for the first time, showing signs of a bearish turn. Overall, several internal leading indicators of US stocks have shown bearish signals. Only when a definitive sell signal appears should positions be reduced; this round is likely just a minor pullback within a bull market.
