Investors should start scaling back risk in their portfolio in anticipation of more favorable buying opportunities in the coming weeks, Chris Watling, CEO and chief market strategist at Longview Economics, told CNBC on Tuesday.
“Our models are flagging up a warning of a wave of risk aversion. This happens very rarely, once or twice a year. We got one just last week, which makes me very nervous”, he said.
A rally in risk assets has pushed global stock markets higher since the start of the year. The S&P 500 is up 6.9 percent year-to-date and has gained 22.3 percent from the 52-week closing low of 1099.23 on October 3, 2011.
The risk of a near-term pullback of between 5 and 10 percent is growing, Watling wrote in a market note.
“The rally has overstretched itself. It’s gone too far, too fast,” Watling said. “We see risk appetite measured very high, there’s very little downside protection in portfolios and a lot of fundamentals underlying the market are deteriorating as well.”
Watling pointed out that sell-offs in risk assets in January and February are typically short-lived in duration and relatively small and as such should be regarded as a buying opportunity.
However, another analyst said the risk-on trade is back in fashion as the US economy is doing better and the European institutions are taking a more "constructive" approach towards solving the debt crisis.