European shares edged back from two-year highs early on Monday and a number of indicators suggested a bullish run for markets at the start of this year could be reaching its peak. By 0904 GMT, the FTSEurofirst 300 shed 1.55 points, or 0.1 percent, to 1,173.26. That compared to a near two-year high of 1,174.81 reached on Friday. Equity funds outgained bond funds for the seventh straight week last week but the pace of inflows slowed, EPFR Global data showed and several major investment banks said there were signs the market may be reaching a natural top. "Our global indicator now stands at +1.39 standard deviations, signaling the most bullish sentiment from equity mutual fund investors since January 2009," strategists at Nomura said in a note. "All of our proprietary regional mutual flow indicators, with the exception of Japan, are also at very bullish levels and along with elevated readings from another of our systematic sentiment indicators, the composite sentiment indicator has prompted our Global Quantitative Strategy Team to issue a short-term tactical neutral position on the market," Nomura said. The Citigroup U.S. Economic Surprise Indicator has turned negative, and bullish sentiment, as measured by the AAII Investor Sentiment Survey, is now in the top 5 percent of the observed readings. JP Morgan said in a note historical data for each of these readings shows they are normally followed by lacklustre equity returns, while downgrading its weighting in cyclicals versus defensives. Technical analysts say the FTSEurofirst 300 and the more broader Stoxx 600 are in overbought territory according to 14-day relative strength indexes which measure the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions. RECENT STRENGTH Stock markets have been supported by signs of a sustained recovery in the United States, while euro zone PMIs, although still in contraction territory, outperformed expectations last week as the economy took a step closer to recovery. "Investors are firmly focused on the forward-looking indicators, as the global environment continues to favour greater weightings in risky assets," Ian Williams, equity strategist at Peel Hunt, said. "At current levels from an asset allocation point of view there would be no great rush to take on further risk. Technical indicators are overbought but the bigger picture question is the equities valuation versus other asset classes, and although not quite as appetising as it was a few months ago it is still a no-brainer," he said. Equities yield around 4 percent, compared with "safer" bonds on about 2 percent and cash which yields close to zero. That drive for yield pushed Transocean 4.1 percent higher after Activist shareholder Carl Icahn said late on Friday he wanted to see the offshore rig contractor declare a dividend of at least $4 per share. ASML climbed 3.4 percent, after Citigroup upgraded the world's leading provider of tools for making computer chips to "buy" citing an improving outlook for earnings. It has been a robust if unspectacular start to the earnings season in Europe, with 57 percent of the companies that have reported earnings beating or meeting expectations. It has been a better start in the U.S., however, where Of the 141 companies in the S&P 500 that have reported earnings to date for the fourth-quarter 2012, 67 percent have reported earnings above analyst expectations. This is higher than the long-term average of 62 percent. Where earnings remain a concern companies continue to get punished by investors. Capita was among the top faller, down 2.1 percent after Canaccord cut its rating to "sell" on valuation grounds warning the medium-term outlook for EPS growth is much more muted for the British outsourcing firm.
