Wall Street is getting very bullish as stocks hit records. Here's why that's worrisome

As the S&P 500 has broken out of its trading range into record highs, euphoria has been growing — fast.

Technicians like Stephen Suttmeier at Bank of America Merrill Lynch have been positively giddy recently, noting a bullish rotation into cyclicals, but also to value from growth, high beta from low volatility, cyclicals from defensives and small caps from large caps.

It’s not just technicians. Strategists and retail investors are gaga with enthusiasm:

1) Barclays says small caps are at an inflection point and poised to outperform: “Headwinds have subsided,” they declare.

2) Mike Wilson’s team at Morgan Stanley expects the cyclical rally will continue: “We think the stage is set for a restocking-driven recovery in Spring 2020 to extend the cyclical rally.”

3) Morgan Stanley also loves the rotation: “We think a secular rotation from Growth to Value is beginning.”

Even the average retail investor is getting bulled up. The American Association of Individual Investors’ weekly sentiment survey showed 40.7% of respondents are bullish, the highest levels since May, while only 23.8% are bearish, also near the lowest levels since May.

The combination of a neutral/accommodative Fed and a better global growth outlook for 2020 are key factors in the euphoria, but the other factors are the seasonal strength and a belief that a China deal on tariffs will eventually be signed.

Futures were jumping again on Friday as the White House signaled once again that the signing of the first part of the trade deal was close.

“Everybody seems to think that FOMO [Fear of Missing Out] will cause institutional players to buy, buy, buy into the end of the year,” Matt Maley, chief market strategist at Miller Tabak, told me. “Everyone is saying that the only thing that can throw a wrench in the works is a breakdown in the Phase One [China] negotiations and nobody thinks that will happen (because both sides need some sort of smaller deal),” he wrote to me.

All this euphoria would be great if we were coming off of a big sell-off — but we’re not. The major indexes are at new highs as is the advance/decline line. Put it all together, and the market is clearly overbought.

Tony Dwyer, senior managing director and chief market strategist at Cannacord Genuity, thinks investors should be cautious, citing the extreme overbought conditions, increased optimism, low volatility and a smaller number of stocks above their recent 10- and 50-day moving averages. “All four intermediate-term indicators suggest waiting to add exposure,” Dwyer wrote in a recent note.

Some astute market observers are not impressed: They say there is nothing new under the sun. Brian Belski, managing director and chief investment strategist at BMO, noted that many on Wall Street are habitually late to the party.

“In my almost 30 years on Wall Street, some things never change, namely, people get bullish after the market rallies,” Belski wrote to me.

He does believe there is “some froth” as everyone on Wall Street chases performance going into the end of the year.

“This does not mean the rally is over,” Belski said. “It just means they are late and undisciplined.”