What Is The Equity Market Implication Of The Spike In The “Soft” Vs. “Hard” Data?

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.

For additional details, please refer to the report titled “Eerie Calm”, available at gss.bcaresearch.com.

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