Equities are exhibiting signs of mild fatigue. Breadth has begun to narrow, and new highs have sagged compared with new lows (see chart). Both of these technical developments have warned of previous tactical pullbacks. The recent reset in oil prices may also test investor nerves.
Oil prices have been a critical macro variable, because they influence inflation expectations and the corporate bond market (high yield bond spreads shown inverted, see chart). Crude oil price
corrections have accurately timed equity retreats (see chart), and general risk aversion phases. To be sure, the global economy is no longer on a deflationary precipice, suggesting that weaker oil prices may not foreshadow a soft patch, but they may be a good enough excuse for profit taking in the equity market after a good run.
Contrary to popular perception…