A number of indicators we track are signaling that the global equity market is extremely stretched.
First, our Complacency-Anxiety Indicator is flashing red (please refer to this post). This sentiment indicator has recently vaulted to an all-time high, and warns of a challenging near-term equity backdrop.
Second, the “Soft” vs. “Hard” economic data Indicator (compiled using Bloomberg data) is also approaching an historic zenith. Such a divergence in survey vs. actual economic data has typically been a precursor of an equity market wobble (see chart). An economic validation period looms and the specter of a soft-patch could serve as a corrective catalyst.
Finally, U.S. dollar based liquidity has plunged to a level associated with recession. The draining in U.S. dollar liquidity is worrisome as it represents a de-facto tightening in global monetary policy. We substituted commodity price inflation for the MSCI All-Country World Index cyclical momentum. The U.S. dollar liquidity message remains similar, warning that at least a digestion period in equities is imminent.
Our sense is that in order for the equity market overshoot phase to prove lasting, a pullback is a prerequisite at this juncture. Were such a phase to materialize in Q1 as we expect, we would view it as a “buy-the-dip” opportunity.