There is a decision to be taken by equity investors heading into a new week and a new month — buy more stocks ahead of a new bull market or sell because stocks are just to too hot and heading for a fall.
Some factors during the coming week — notably U.S. jobs data, a raft of European company results with banks to the fore and the performance of Chinese stocks after Wednesday's dive — may help them decide.
But they may simply be swayed by concern that global equity markets have rallied so rapidly and so sharply over the past four months that a pause of some kind soon is almost inevitable. Consider the following:
* MSCI's all-country world stock index has spent the past week hitting a series of new year highs. It is up close to 55 percent from its March low.
* Reuters asset allocation polls for July show global investors have taken their equity holdings back up to levels last seen a fortnight before Lehman Brothers collapsed in September. Safe-haven cash holdings are at the lowest level since May 2007.
* Fund tracker EPFR Global says equity funds had net inflows of $9.52 billion in the week to July 27, the highest weekly tally since mid-June 2008.
These kinds of milestones have a number of investors worrying about whether financial markets are getting ahead of themselves.
The 160 billion euro investor Pioneer Investments, for example, has warned that markets are pricing in a rapid return to sustained economic growth rather than a slow recovery from what is a deep recession.
More colourfully, Mohamed El-Erian, the influential chief executive of $842 billion bond fund manager PIMCO has described equity markets as being on a "sugar high".
EARNINGS VS ECONOMY
The driver of much of the recent bullishness — which is steering currency, credit and government bond markets as well — is the corporate earnings season, which has been a delight for many equity investors.
With slightly more than half of the S&P 500 U.S. stock index having reported, some 76 percent have beaten expectations and only 14 percent missed them, according to Thomson Reuters Proprietary Research. The data for Europe's DJ STOXX 600 is not quite as supportive, but still leans to the positive. Of the first 95 companies to report, just below 53 percent have beaten expectations to 45 percent who have missed.
More will come in the week ahead, with European banks particularly in sight. HSBC, the bank that first issued a profit warning in 2007 over U.S. subprime mortgage losses, reports on Monday.
Other big names due include Procter & Gamble, Prudential Financial, Cisco Systems, Barclays, BMW and Societe Generale.
The momentum of positive earnings so far is likely to continue, according to Bob Parker, vice chairman of Credit Suisse's asset management arm, keeping the rally going for at least a while.
"Valuations are looking overbought … but I think further cash will be put into the market over the next few weeks," he said.
In the meantime, many investors are still saying that for the kind of risk-asset rally that has been under way for the past few months to continue, real signs of global economic recovery will be needed, not just signs that the worst is over.
The economic debate in the coming week is almost certain to be dominated by Friday's U.S. non-farm payrolls report, a potential roadblock given that jobs are among the last to improve when economies do and have a large impact on consumer sentiment.
SHANGHAI SURPRISE
The new wrinkle for investors may be China, where stocks have been on a massive rally this year rising more than 87 percent from low to high.
Last Wednesday, the Shanghai bourse sent ripples around Asian financial markets when fears that major Chinese banks may start restricting loans to cool various booming markets led to a 5 percent daily tumble.
Contagion was generally limited to emerging markets and the index has rebounded more than 4 percent in the two trading days since.
The highly speculative Chinese market has often seen such sharp one-day drops without suffering long-term damage. In June 2007, the index tumbled over 8 percent in a single day after the government raised the stock trading tax, but recovered that loss within a week.
But as the poster child for this year's swift market rally, China will be watched closely in the week to come.
