Several significant events over the next two weeks could trigger market volatility.
As US stocks retreat from their record highs, Citigroup has indicated that a key market risk indicator has hit its highest level since the 2008 financial crisis. However, the firm suggests investors do not need to exit the market immediately.
Major Warning Signs
A team of strategists led by Beata Manthey at Citigroup informed clients on Friday that their bear market checklist has been triggered. The global market is flashing 10 out of 18 warning signals, while the US market is showing 11.5 out of a possible list. The current number of active warnings is at its highest level since the global financial crisis.
Nevertheless, compared to data preceding previous bear markets, the current warning intensity remains relatively moderate. Before the 2000 dot-com bubble burst, 17.5 warnings were triggered, and 13 were active before the financial crisis erupted. Therefore, the strategists assess that the market is not yet showing signs of "excessive euphoria." While advising vigilance regarding rising risks, they maintain a positive outlook for the stock market's future performance.
Citigroup's warning checklist monitors dimensions including stock valuations, market sentiment, credit spreads, the yield curve, fund flows, corporate fundamentals, and financing activity. The strategists emphasize that this indicator cannot precisely time the market or predict the start and end points of a stock market correction. Its primary use is to assist investment decisions during broader market declines and to signal when investors need to heighten their defensive posture.
The team wrote in the research report: "However, we note that once this warning indicator enters the double-digit trigger range, historical data shows that subsequent warning signals often accelerate, implying that market risks may intensify rapidly. If warning items continue to accumulate subsequently, then buying the dip during a market correction may no longer be advisable."
Dragged down by Broadcom's disappointing earnings report, market enthusiasm for the technology sector has cooled somewhat, ending the S&P 500's nine-week winning streak. Market data shows the S&P 500 has set 24 record closing highs this year, with the latest occurring on Tuesday, June 2nd.
Regarding the currently triggered warning signals, valuations across multiple stock sectors are significantly stretched, and market investor sentiment remains persistently optimistic. Other warning risks are also heating up: driven by major AI cloud service providers, corporate capital expenditure growth is rising. The recovery in IPO and equity financing volumes reflects persistently high market risk appetite.
"The US Treasury yield curve has gradually flattened since the beginning of the year, but key indicators like credit spreads remain low, sending a relatively positive market signal. However, if risks in the private credit market are exposed collectively, or if debt financing related to AI capital expenditures expands significantly, these favorable indicators could potentially deteriorate." Overall, Citigroup believes there is no immediate signal for a sharp short-term stock market decline. "Reviewing history shows that major market tops are rarely triggered by a single negative factor; typically, multiple indicators simultaneously enter extreme overbought territory before a top is formed."
Short-Term Risks
Options market analytics firm SpotGamma has issued a warning that several important events over the next two weeks pose a threat to the current overwhelmingly bullish sentiment. "June sees a dense schedule of key events; we are closely monitoring the market for the next surge in volatility."
First, the US Consumer Price Index (CPI) for May will be released on June 10th. Influenced by the situation in Iran, energy prices have risen sharply, making inflation a core concern for investors once again.
On June 12th, SpaceX is set to launch its Initial Public Offering (IPO). "Russell Indices recently revised their rules to allow for the inclusion of SpaceX in their indices at least five trading days after its IPO completion," SpotGamma added. "Other major indices are highly likely to make similar adjustments subsequently. The inclusion of this company, valued at $1.8 trillion, into indices could further amplify market volatility."
Similar concerns are not uncommon on Wall Street. Bob Elliott, co-founder and CEO of asset management firm Unlimited, has stated that the upcoming wave of mega-IPOs could "siphon funds from financial markets." Joe Mazzola, Director of Trading and Derivatives at Charles Schwab, noted: "I believe market demand for SpaceX and other large IPOs this year is very strong." He cautioned that some investors might sell high-flying popular stocks to participate in these new share subscriptions.
Immediately following, on June 17th, the Federal Reserve will announce its first policy decision under new Chairman Kevin Warsh. The next day (Thursday) will bring the June options expiration day—due to the Juneteenth holiday, the expiration is moved up from the usual Friday to Thursday. At that time, over $5 trillion worth of contracts across four categories—individual stock options, index options, stock index futures, and single-stock futures—will expire simultaneously, often exacerbating market volatility.
Research firm McMillan Analysis wrote in its latest report that major stock indices, including the S&P 500, have entered extreme overbought territory. However, the primary bullish trend remains intact. Corrections within an overbought environment are normal, and short-term confirmatory sell signals may emerge gradually, though none have materialized yet.
The firm's analysis found that the market-wide put/call ratio continues to decline: call option volume far exceeds put volume. This indicator is deep in overbought territory but still signals a bullish bias; a reversal upward would trigger a broader market sell warning. Simultaneously, market breadth is weakening, with breadth oscillators nearing a bearish flip. On June 3rd, the number of stocks hitting new 52-week lows on the NYSE slightly exceeded those hitting new highs for the first time, showing early signs of a shift to negative momentum. Overall, several internal leading indicators for US stocks are beginning to show negative signals. The firm advises waiting for definitive sell signals before executing portfolio reductions, as this move is likely just a minor pullback within the ongoing bull market.
Comments