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Investor optimism has gotten out of hand, according to Citigroup. In fact, a stock market sentiment model from the firm called the Levkovich Index has now reached euphoria levels, which typically heralds a fall in equities, the firm’s U.S. equity strategist Scott Chronert wrote in a Thursday note. The Levkovich Index, named after the bank’s late U.S. equity strategist , measures sentiment using a variety of factors, including short interest as a percentage of float on the New York Stock Exchange, as well as the ratio tracking the number of put options outstanding versus call options. The index was last sitting at 0.40, above the 0.38 level that points to euphoria, the Chronert note said. By comparison, a reading below 0.17 would indicate markets in full-fledged panic mode. On a median basis, that gauge suggests equities could decline 8.9% over the next 12 months, a drop that would put the S & P 500 around 4,780. The broad market index was last above the 5,200 level, having already breached Chronert’s 5,100 year-end target. “We have to be wary that sentiment is in a fairly euphoric area,” Chronert told CNBC’s ” Squawk on the Street ” on Monday. Chronert noted that investors should not use the Levkovich Index as “a short-term timing tool” for stocks, that “[e]xhaustion may not be enough,” and that some sort of catalyst is probably still needed to send prices lower, he wrote. The Federal Reserve turning more hawkish than investors currently anticipate, for example, could prove an impetus for a decline. “The consensus is for three rate cuts this year,” Chronert said. “But if you do go down a path where you get a fewer number of Fed rate cuts, or even a lack of a pivot, I’d say that probably brings our euphoric concern back into play.” .SPX YTD mountain S & P 500 Chronert is not the only one concerned about a stock market pullback from current levels. On Sunday, BTIG’s Jonathan Krinsky noted the biggest risk to the market in April is unwinding momentum, citing the historical performance of the GS Long/Short High Beta Momentum Index (GSPRHIMO). “[The GSPRHIMO is] 32% above its 200 DMA, a level only exceeded twice in the last 15 years. It was +~36% on the quarter. Since inception (’04), it has only been up 30%+ for a quarter twice (2Q ’08, 1Q ’20),” Krinsky noted. “The following quarters it was -22% and -23%, respectively.” Meanwhile, Citigroup’s Chronert downgraded the technology sector to market weight, saying the “Cyclical barbell we have advocated for several months now allows for a broadening into Defensive parts of the market, particularly those that are more interest rate sensitive.” In fact, the tech sector was the worst-performing sector last week, as investors dumped this year’s market leaders as the first quarter came to an end. Last week, the S & P 500 information technology sector was down 1.26%. On the first trading day of the second quarter, the group was recently down about 0.1%.
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