US equity pullback is overdue - RBC

Investing.com - The main U.S. indices have slipped lower Monday, retracing from the all-time highs seen late last week, a pullback that is overdue, according to RBC Capital Markets.

At 10:40 ET (14:40 GMT), the S&P 500 index fell 0.2% to 5223.49, the Dow Jones Industrial Average fell 0.3% to 39,353.39 and the NASDAQ Composite dropped 0.2% to 16,401.91.

The U.S. equity market sentiment has looked stretched on a variety of indicators, RBC said, in a note dated March, including AAII net bulls, CFTC buyside, positioning in U.S. equity futures, the University of Michigan survey’s questions on the outlook for stock prices, and the Fed Flow of Funds data on U.S. equities as a percent of financial assets.

However, the bank noted that data from Friday’s update showed that buyside CFTC positioning in U.S. equity futures reversed course and moved up.

“We continue to see sentiment as stretched and think a U.S. equity market pullback is overdue,” RBC said. “ But the risks of a melt-up, particularly given the dovish Fed meeting and rapid increases to 2024 GDP that are underway, have admittedly grown.”

The bank’s analysts are keeping a close eye on the AAII consumer sentiment data, saying net bullishness has been roughly one standard deviation above its long-term average, but not two standard deviations which can occasionally mark the top.

“We are starting to worry again that we’ll get there before this rally takes a breather,” RBC said.

This would be good news for the U.S. equity market in the short term, it’s bad news over the longer term as the S&P 500 tends to fall on a 12-month forward basis when that plus the two-standard-deviation threshold is reached.