As investor optimism nears 2-year highs, analysts warn of stock-market pullback

The 2020 bull market has picked up right where 2019 left off: with steady gains and another round of records.

The S&P 500 index SPX, +0.48%  has risen 1.6% year-to-date and the Dow Jones Industrial Average DJIA, +0.14%  has gained about 1.2%, while the Nasdaq Composite Index COMP, +0.79%  has advanced 3.1% so far this year, and each benchmark has set two record closes during the first seven trading days of the year. But these gains could be evidence of exuberance in the stock market that is setting investors up for a pullback, analysts say.

“The bullish sentiment we’re getting now has reached the uncomfortable stage,” Jeff deGraaf, chairman of Renaissance Macro Research said during a Monday webcast with clients. He said that during the final months of 2019, he was willing to overlook signs of overconfidence because November and December are historically good months for stock-market gains.

“But now that we lose that seasonal tailwind, the sentiment picture is a little more concerning and some of the levels we’ve seen are, frankly, similar to what we saw in January of 2018,” when the S&P 500 lost more than 10% between Jan 26 of that year and Feb. 8.

DeGraaf said he was concerned about the put-call ratio, or the proportion of outstanding options to buy stock relative to options to sell stock for the S&P 500 index over a 5, 10 and 25-day moving averages. Investors are buying more put options relative to call options at a rate not seen since early 2018.

Renaissance Macro Research

Other measures of market sentiment are also reaching extreme levels. CNN’s Fear & Greed index sits at the 89 level, indicating “extreme greed.” The index takes into account the ratio between the percentage of stocks hitting their 52-week highs relative to the

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