LONDON, Jan 25 (Reuters) - Funds hoovered up a record $33.2 billion of stocks over the last week, analysts at Bank of America Merrill Lynch said on Friday, but they warned a pullback in sky-high markets in the coming couple of months was now "very likely".
The rush included a record $2.1 billion into tech stocks, the second biggest week for emerging market shares at $8.1 billion, $7 billion into U.S. markets as well as $4.6 billion and $3.4 billion respectively into European and Japanese stocks.
A total of $21 billion of that money was poured into exchange traded funds. The boom also saw the value of assets held in the world's largest ETF - State Street's SPDR S&P 500 ETF - equal the annual GDP of Denmark at $300 billion.
"BofAML Global Wealth & Investment Management private client equity exposure (is) rising at fastest pace in 10 years and cash allocation is at record low (10 percent)," BAML analysts said in a weekly note on capital flows.
They also highlighted that 98 percent of global equity markets are now trading above 50 and 200-day moving averages, though the pace of the melt-up meant a correction was now increasingly likely.
BAML's 'Bull & Bear' gauge, which takes the temperature of markets, is now flashing overheating warning signals at 7.9, just under the 8 level that BAML recommends selling.
It is the indicator's highest since March 2013. It has given 11 sell signals since 2002 with a 100 percent hit ratio, BAML said. Average equity peak-to-trough drops in the following 3 months after the signal have been 12 percent they added.
Further inflows into high yield and emerging market debt as well as equity funds would cement the sell signal. A "tactical S&P500 pullback to 2686 points in Feb/Mar (is) now very likely," BAML's analysts said.
They also warned a reversal of the dollar's recent weakness could also spark a sharp correction. A U.S.-Europe FX spat was a trigger of the 1987 stock market crash they said. "Higher dollar "pain trade" = risk-off coming." (Reporting by Marc Jones; Editing by Toby Chopra)