Is this the greatest threat to the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) bull market?

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index looks poised to extend the 3% dive and if you are looking for someone or something to blame, you will need to look overseas.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you are looking for someone or something to blame for the recent ominous market sell-off, you will need to look overseas.

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index looks poised to extend the 3% dive from last week as investors will likely refrain from buying the dip ahead of the weekend when US President Trump could announce a massive step-up in his trade war with China.

This could provide the bears with an excuse to extract revenge given the gravity defying performance of global share markets, including ours, that has seen short-sellers nursing painful losses (click here for more on this).

But the US$200 billion in fresh tariffs is only the trigger. The real threat to the advance of the ASX is something more sinister – euphoria.

The high that investors are feeling is more an issue in the US than it is here, and this has historically been a precursor to a market correction.

Our nation's economic wagon may be hitched to China but there's little chance we will escape unscathed from a significant pullback on the S&P 500.

Citigroup warns that a risk or a deeper sell-off, or even a bear market, has increased significantly as its proprietary "Panic/Euphoria" model is flashing a warning sign as investors' sentiment has reached euphoria.

The last time this the model hit euphoric levels in January and early February this year, the S&P 500 tumbled on wage pressures. This concern hasn't abated and this time round the US stock benchmark could fall a further 5%-plus.

Getting High: Citi's Panic/Euphoria gauge flashing red

"In essence, five of the nine inputs [into the Panic/Euphoria model] have pushed the gauge into worrisome territory," said Citigroup.

"At these levels, there's a 70% chance of the S&P 500 being down 12 months from now, which is more than three times the random probability of losing money."

Goldman Sachs is also waving the red flag as its own bull/bear market indicator has reached dangerous levels, according to a report on Bloomberg.

This doesn't necessarily signal the end of the bull market, but the broker said that investors should be prepared for lower returns following the nine-and-a-half-year bull run on the S&P 500 that has generated 19% annual gains.

Goldman's bull/bear indicator has a close correlation with the forward returns on the market benchmark since 1955 and has correctly picked the peak in the market during the last two bear markets.

A bear market refers to a drop of at least 20%, and I am not predicting that we are heading into one. If anything, I suspect we can make one more push higher after the current pullback.

This means equities will still be one of the best asset classes to put your capital to work and we should use the drop in share prices as a buying opportunity.

However, I think we will see a rotation out of high price-earnings (P/E) stocks, such as CSL Limited (ASX: CSL) and Afterpay Touch Group Ltd (ASX: APT) into value stocks that are trading below their historical and market P/Es. This may already be starting as these premium stocks have copped a big beating.

The bull party may end in 2019, but we'll worry about that in the new year.

Should you invest $1,000 in Eroad Limited right now?

Before you buy Eroad Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Eroad Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 6 March 2025

Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Happy work colleagues give each other a fist pump.
Growth Shares

3 beaten-down ASX growth shares that could roar back in 2025

These beaten down shares could be top buys according to analysts. Let’s find out why.

Read more »

A young man sits at his desk working on his laptop with a big smile on his face due to his ASX shares going up and in particular the Computershare share price
Blue Chip Shares

3 no-brainer ASX 200 shares to buy after the market selloff

Analysts think very highly of these quality shares. Here's why they could be buys.

Read more »

A woman stacks smooth round stones into a pile by a lake.
Defensive Shares

ASX defensive stocks to buy now for stability

Amid a building trade war, these stocks could provide stability.

Read more »

A businessman holding a world globe in one hand, representing global investment.
Growth Shares

3 exciting ASX growth shares with massive long-term potential

Analysts think these buy-rated growth shares could have significant potential.

Read more »

Person holding Australian dollar notes, symbolising dividends.
Dividend Investing

How I would build a $1,000 monthly passive income stream with ASX shares

It isn't as hard as you might think to build a sizeable passive income.

Read more »

Middle age caucasian man smiling confident drinking coffee at home.
Dividend Investing

3 undervalued ASX dividend stocks paying a remarkable 6%+

Analysts are expecting big payouts from these shares.

Read more »

A young boy points and smiles as he eats fried chicken.
Cheap Shares

Why these brokers are bullish on this ASX 200 stock

Investors need to know about this share which brokers view as a tasty opportunity.

Read more »

An ASX investor in a business shirt and tie looks at his computer screen and scratches his head with one hand wondering if he should buy ASX shares yet
Dividend Investing

Where are my dividends? A small error costing shareholders big dollars

There’s millions of dollars in unclaimed funds floating around. Does some of it belong to you?

Read more »