At the beginning of July, strategists at Bank of America, led by Michael Hartnett, suggested if the S&P 500 index traded above 6,300 points this month it would trigger a ‘sell signal’.

Though he added the proviso that ‘overbought markets can stay overbought as greed is harder to conquer than fear’.

A week later, the team described fund manager sentiment as measured by their monthly global survey as the most bullish since February due to a ‘record surge in risk appetite’ since mid-April, profit optimism, allocation to tech stocks and shorting the US dollar.

They also flagged investor cash levels falling to below 4% as another ‘sell signal’, but suggested with equity positioning not at extreme levels, and bond volatility still low, investors would ‘more likely stick to a summer of hedging and rotation rather than big short bets and retreat’.

So, here we are at the end of July, with the S&P 500 firmly above the 6,300 level having made more than 10 new highs in the space of 20 trading days, and not a whiff of retreat.

As the old saying goes, no-one rings a bell at the top of the market, so what signals should investors look for to protect themselves, if indeed markets are due a fall?

The sudden return of ‘meme stocks’ is a sure sign of market mania, but that in itself is no reason to be worried.

These are typically beaten-down stocks where retail investors are amusing themselves trying to squeeze out professional short sellers and make a quick killing, they aren’t big-name companies being pushed to extreme valuations.

It may sound pat, but at the end of the day fundamentals matter, and as the earnings season starts we are already seeing a number of companies warning on profits and/or lowering their guidance.

We wrote recently that Wall Street analysts have consistently low-balled estimates in order for companies to beat them by a few percent, but investors no longer seem willing to play the game and chase up their shares.

Therefore, the more companies which fall by the wayside, the greater the onus on the rest to deliver, and the narrower the market leadership becomes.

Year-to-date, the best-performing sector hasn’t been technology – which is third on the list – but capital goods, followed by business services.

After technology come more ‘old economy’ sectors like consumer and retail, then basic materials.

Investors need to watch for signs of weakness across these sectors, as tech will likely get a ‘free pass’ – until something blows up spectacularly, by which time it will be too late to worry.

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