The Fat Pitch

Retail sales fell into contraction in December. Employment in February was the lowest since 2010. November new home sales growth dropped 14%. It was an ugly winter for macro data, but that weakness now looks anomalous: the data from the past month mostly point to positive growth. A recession starting in 2019 looks unlikely.

NDX is now at a new all-time high (ATH). Leadership by NDX is a positive for SPX: historically, the risk/reward over the coming weeks and months for SPX has been excellent. Volatility has been unusually low so far this year. That's unlikely to last.

This has been one of the 10 best ever starts to a year; over the past 60 years, similar fast starts have consistently led to continued gains in the months ahead.

NDX, RUT and DJIA have all risen 9 weeks in a row. Long win streaks like these have a very strong propensity to continue higher, although an interim period of consolidation and retracement is frequent. Years that start as strongly as 2019 have almost always added sizable gains the rest of the year.

Corporate results in the fourth quarter of 2018 were good, but not great: sales grew 6% and earnings rose 32%, but profit margins fell hard. Expectations for 10% earnings growth in 2019 have already been revised down to 5%. This still looks too optimistic...

SPX is now back to within 1% of the top of its trading range from October to early December. It would be very surprising if SPX did not encounter some resistance as it nears 2790-2810.

Fund managers came into 2018 very bullish, with cash levels at 4-year lows and allocations to global equities at 3-year highs. Global equities ended the year 15% lower.

SPX has now gained 16% since Christmas Eve, while the Nasdaq is up 19%. NDX, RUT and DJIA have all risen 7 weeks in a row. Large, uncorrected gains like these are typically near the outer limit before a period of consolidation/retracement.

SPX has now gained 13% since Christmas Eve, while the Nasdaq is up 16%. After the recent plunge, it would be normal for the indices to give up most of their gains and retest the lows again. That's been a consistent pattern over the past 40 years.

What is notable about the 10% rally since Christmas Eve time is the persistence of the gains each week, and the exceptional breadth (participation) that has driven the indices higher. This is important because, in the past 70 years, this has never taken place within the context of a bear market.

Equities fell 20% from their September high into Christmas Eve. Since then, they have rallied almost 8%. While this is encouraging, there were two similar rallies, at the start of November and December, that both fizzled out. What is different this time?

The data from the past month continues to mostly point to positive growth: employment, wages, consumption and manufacturing are all trending higher. But there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.

SPX had formed a topping pattern in August, and events since then have only strengthened this pattern. But there is little evidence of the underlying stress that is normally associated with big problems. This is not a market trying to efficiently discount next year's growth; it's a market mostly driven by fear and emotion.

The macro economic story is starting to change. The data from the past month continues to mostly point to positive growth, but there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.

Corporate results in the third quarter were excellent. Looking ahead, expectations for 10% earnings growth in 2019 looks far too optimistic and will likely be revised downward as the substantial jump in margins this year is unlikely to continue. Earnings are at risk of falling.

Fund managers are still overweight global equities, especially US equities. But in most other respects, managers are very bearish, having multi-year low profit and economic growth expectations. A third believe the S&P has already peaked. Their cash allocations are high.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

With SPX closing below its 10-month moving average, a sell signal for a popular trend following system triggered today. This system has handily beaten the long-term performance of just holding SPX. So what happens next?

US equities are down 10% from their all-time highs just 5 weeks ago. The trend in equities has turned bearish, and that is not something that should be taken lightly. The evidence pointing to a major top being formed has further increased.

Equities fell 4-5% last week and have given up most of their 2018 gains so far in October. This might feel like the start of a bear market, but that is the least likely outcome.

After being out of favor for 17 months, fund managers are now overweight US equities by the most since January 2015. It's at an extreme, and the US should underperform.

The longer term trend is positive but the near-term outlook is unfavorable. It seems unlikely that any equity weakness will be substantial or long lived, but investors should remain on alert to heightened risk over the next several weeks. We believe that will be a good set up for gains into year end.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

SPX, NDX, small caps as well as broad measures like the Russell 3000 - which equals 98% of total US market capitalization - made new all-time highs (ATHs) last week. The trend is clearly higher, and several new momentum studies suggest that equities are likely to gain more before year-end.

US equities have returned to their January all-time highs. Several new momentum studies suggest that equities are likely to gain more into year-end. Despite the gains over the past 5 months, investor sentiment is not frothy. US equities now have a topping pattern in place: the momentum high in January has been followed a price high in August.

Corporate results in the second quarter were excellent. S&P sales grew 11%, earnings rose 27% and profit margins expanded to a new all-time high of 11.4%. Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself. The strong growth in company profits is not due to the net reduction in shares through, for example, corporate buybacks.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

The 5 largest stocks are big (but not unusually so) and outperforming most other stocks (which is how they came to be in the top 5). All of this is normal. Over time, stock indices have typically been driven higher by a small number of stocks. And over time, those leaders have continually changed.

US equities have gained every month since April, and are up over 3% so far in July. Our long term view remains that SPX will make a new all-time high in the months ahead. The short term is less clear.

Emerging markets equities have lagged in 2018 and throughout most of the last decade. Recent fund outflows have been extreme. Fund managers are underweight the region. Their currencies and commodities are not liked. The region is now "cheap" and it might be ready to outperform.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

When thinking about the last 20 years, investors easily recall the tech bubble, the financial crisis and the flash crash in 2010 that together form the most recent lost decade for equities. These negative events dominate our decision making. The (more important) 300% return from equities during this time does not.

US equities are up three months in a row and positive for the year. Historically, equities have a very strong propensity to end the year higher under these circumstances. That remains our long term view. Shorter-term, the S&P remains in a 5 month consolidation/trading range.

Debt is a perennial worry, but much what you hear about debt in the US is hyperbole. Here are the facts. Household debt has fallen in the aftermath of the Great Recession and debt relative to net worth is as low now as in 1985. Corporate leverage today is not materially different than it was in 1993 or 2003, i.e., early in two expansion cycles.

US equities are up two months in a row and positive for the year. They are outperforming the rest of the world, despite ongoing Quantitative Tightening here and QE abroad. In the past few days, the Nasdaq has joined the small cap indices at new all-time highs.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

It's true that equities fall before the start of most recessions. So why bother following the economy; why not just follow the price of equities? "Market corrections" occur every 20 months, but less than a third of these actually becomes a bear market. Recessions almost always lead to bear markets, and bear markets outside of recessions are uncommon. For that reason, discerning whether a recession is imminent can help determine when an innocuous correction is probably the start of a sinister bear market.

The conventional wisdom is that "healthy breadth" is necessarily bullish. This sounds intuitively correct: a broader foundation - where more stocks are ticking higher - should equal a more solid market, but it is empirically false.

Demographics is a key driver of economic growth (and, thus, the stock market). Many investors fret over the aging of the Boomer generation. But the Millennial and Gen X birth cohorts are almost twice as large as the Boomers. Behind the Millennials is Gen Z, a group almost as large as the Boomers.

Equities are 2-5% higher so far in May, trying to add to their small gains from April and put behind a rough winter. This week, small caps closed at a new all-time high (ATH) and NDX broke to a 7 week high near its March ATH.

In the past 9 months, US equities have outperformed Europe by 6% and the rest the world by 5%. Despite this, fund managers remain underweight the US. US equities should continue to outperform their global peers on a relative basis.

In the past 9 months, US equities have outperformed Europe by 6% and the rest the world by 5%. Despite this, fund managers remain underweight the US. US equities should continue to outperform their global peers on a relative basis. Fund managers' inflation expectations are near a 14 year high...

Overall, corporate results in the first quarter were very good. S&P sales grew 10%, earnings rose 24% and profit margins expanded to a new all-time high of 11.6%. Fundamentals are driving the stock market higher, not valuations.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

In summary, there are two seasonal patterns currently in play for investors: the weak "mid-term election cycle" and the weak "summer months." In truth, neither cycle is bearish. If you sell in May, you should expect to buy back higher in November.

US equities have been in a consolidation phase for most of 2018. In the past, these consolidation periods have lasted a half year or longer - so this might continue into summer - although some measures of sentiment are already near a washout. New highs are very likely to still lie ahead in 2018.

Trade war rhetoric is driving US equities, meaning, what happens next in the equity market is very much a function of which trade posture the administration adopts next. Longer term, it's unlikely much of the current rhetoric will make into actual policy as it suits no one's economic interests.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

Fund managers came into 2018 very bullish equities. Cash levels had fallen to the lowest level in 4 years. Allocations to global equities had risen to the highest level in nearly 3 years. Bond allocations were at a 4 year low. Our view at the time was that "this is a headwind to further gains" in equities.

The Nasdaq closed at a new all-time high (ATH) on Friday. It has risen 6 days in a row. A number of studies suggest that it should continue to rise further, and that SPX should follow it, probably also to a new ATH. That is the near term set up as equities enter March options expiration week.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The long term trend in US equities remains firmly higher. Expectations should be for equities to rise in the months ahead. The near term directional edge is more muted. Worldwide, equities are in the process of retesting their February lows. The US is being held up mostly by technology and financial stocks.

S&P sales grew 9% over the past year, the best growth in 6 years. Earnings rose 23%, the best growth in 7 years. Profit margins expanded to a new all-time high of 10.8%. Overall, corporate results in the fourth quarter were very good. Earnings during 2017, in fact, rose as much the SPX index itself. The outlook for 2018 appears to also be strong: the consensus expects earnings to grow as much as 18% this year.

After falling into their first correction in two years, US equities regained half of their loses in just 6 days. The rebound has been strong enough and persistent enough to suggest that it has further to run. Sentiment and volatility backwardation support that view. However, a low retest over the coming weeks is still a viable risk.

Corrections during bull markets have had a strong propensity to form a double bottom. Since 1980, only 16% of corrections have had a "V bounce" where the low was never revisited. The current bull market has been different. Since 2009, about half of the corrections have had a "V bounce." So what happens this time? It's a good guess that if sentiment quickly becomes very bullish, then a retest of the recent low is probably ahead.

Prior falls like the one suffered over the past two weeks have led to quick recoveries. That likelihood is further supported by a washout in breadth, volatility and several measures of sentiment. Moreover, the fundamental backdrop remains excellent. Risk/reward is heavily biased towards upside in the near term.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

US equities have already gained more in the first few weeks of January than they do in many full years. The recent trend is being termed unprecedented, but these types of gains have happened before. The current trend is also being called unsustainable, but in most prior cases, equities have continued higher.

As 2018 begins, cash levels have fallen to the lowest level in 4 years. Allocations to global equities have risen to the highest level in nearly 3 years. In most respects, investors are now bullish. Fund managers remain underweight the US. US equities should outperform their global peers.

After just two weeks, the SPX is already within 2% of Wall Street's year-end target. By at least one measure, momentum is at a more than 20 year high: in prior instances, short-term risk/reward has been poor but longer term returns positive. Sentiment, which is exceedingly bullish, has also most often led to positive returns 3-6 months later.

US stocks will likely rise in 2018. By how much is anybody's guess: the standard deviation of annual returns is too wide to get even close to a correct estimate on a consistent basis. Earnings growth implies 6% price appreciation, but tax cuts could boost that to 13%.

All of the US equity indices made new all-time highs this week, for the first time since mid-October. SPX and DJIA have risen 8 months in a row. By some measures, investor sentiment is more bullish now than at any other time in more than a year, driven, apparently, by enthusiasm for tax reform legislation. The current uptrend is extended, and may be getting ready to take a short break, but further gains are likely during the first several months of 2018.

The big event this week is the FOMC meeting on Wednesday, during which a decision to raise the Fed Fund Rate is expected. This would be just the 4th rate increase this economic cycle. Each of the previous events was followed by a pullback in SPX and also a multi-week period where the index did not hold any gains.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

All of the US equity indices continue to make new all-time highs. SPX and DJIA have risen 8 months in a row. The current uptrend is extended, and may be getting ready to take a short break, but further gains are likely during the first several months of 2018. December is typically the strongest month of the year for equities. But as bullish as December tends to be, an intra-month drawdown of 2% has been common, even in recent years. By some measures, investor sentiment is more bullish now than at any other time in more than a year. That could mute returns over the next month or so.

US indices closed at new all time highs on Tuesday. The gain was so strong that SPX closed 25% above its upper Bollinger Band. This is rare. There have been only 5 similar instances since 2009.

On its own, a flattening yield curve is not an imminent threat to US equities. Under similar circumstances over the past 40 years, the S&P has continued to rise and a recession has been a year or more in the future. Investors should expect the yield curve to flatten further in the months ahead.

Macro economic data is good. It seems likely that rates will be higher in a year and that suggests treasury yields will also be higher than they are now. But the path between here and higher yields is unlikely to be as straight-forward as is currently believed.

Global equities have risen 18% so far in 2017 and yet, until this month, fund managers have held significant amounts of cash and been, at best, only modestly bullish on equities. All of this has suggested lingering risk aversion. That has now changed.

For the third quarter (3Q17), S&P earnings rose 12% yoy, sales grew 6% and profit margins expanded to new all-time highs. Bearish pundits continue to repeat several misconceptions...

US equities continue to make new all-time highs (ATHs) and the outlook into year-end is favorable. This week's interim fall of nearly 1% followed by a strong rise into the close demonstrates the market's continued resiliency. It might also indicate waning upward momentum. There remain a number of reasons to suspect that more weakness is ahead, although this is likely to be only temporary.

The major US indices closed at new all-time highs (ATH) again this week, led by the surging technology-heavy Nasdaq. SPX is now higher 7 months in a row; that level of momentum has not marked a bull market high. Several short-term studies - using trend, sentiment, volatility and breadth - suggest a lower close than today may be ahead in the next few weeks. Any weakness is likely to be temporary.

The macro data from the past month continues to mostly point to positive growth. Unemployment claims are at a new 40 year low. New home sales are at a new 10 year high. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The narrative about the Fed's policy has shifted over time as equities have risen. As late as 2012, QE was viewed as bearish. Into 2014, it was only continued QE inflows that were considered bullish. When stocks kept rising after QE ended, the narrative shifted to the large Fed "balance sheet" and then to global central bank actions.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The major US indices traded at new all-time highs (ATH) again this week, led by surging small cap stocks. SPX is now higher 6 months in a row and 10 of the past 11 months; that level of momentum has never marked a bull market high. Short-term optimism has reached an extreme that has resulted in a lower weekly close within the next 6 weeks every time over the past 5 years. The fundamental narrative for the current rally is that the Trump administration's tax plan will boost earnings by an estimated 6%. If investors expect the tax plan to also cause economic growth to accelerate, they are very likely to be disappointed.

The major US indices all traded at new all-time highs (ATH) this week. Even the lagging small caps index closed at a new ATH on Friday, and transports are very near a new ATH. Persistent strength like that seen throughout 2017 has almost always continued into year-end. However, like last week, a few studies suggest short-term upside will likely be limited. The third quarter ends on Friday.

The major US indices all recorded new all-time highs (ATH) this week. The very broad NYSE, covering 2800 stocks, also made a new ATH, suggesting the rally is supported by adequate breadth. Longer-term studies and the fundamental macro data continue to indicate that further upside into year-end is odds-on. On a short-term basis, there are several reasons to be on alert for weakness over the next week or two. An important FOMC meeting is on deck for Wednesday.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

Global equities have risen 7% in the past 3 months and 16% in the past year, yet fund managers continue to hold significant amounts of cash, suggesting lingering doubts and fears.

US equities reached a new one-month low late last week before rebounding on Friday. In particular, NDX found support right on its mid-May low. This is now an important line in the sand, with implications for SPY as well; so long as the Thursday low holds, look for higher prices.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The strong, uninterrupted start to the year for equities is very likely to lead to further gains in the second half of the year. But the crack that opened in NDX two weeks ago has widened further and the consistent historical pattern is for SPX to follow, lower.

Take the US tech bubble of the 1990s, add the subsequent real estate bubble of the 2000s, multiply by two, and you have a good approximation of the events leading to Japan's stock market crash in 1990. The Nikkei stock index rose more than 900% in the 15 years before it finally topped. It was a frenzy powered by a belief that Japan Inc. was on its way to taking over nearly every major industry worldwide. The stock market bubble was further fueled by a massive real estate bubble at least twice the size of the one the US experienced in the 2000s. Tokyo alone became more valuable than all the land in the US. In short, it was the product of a tsunami of monumental and concurrent events that are unlike anything present in the US today.

NDX has opened a noteworthy crack in US equities. NDX has fallen 4.5% in the past week. In the past 7 years, falls of more than 4% in NDX have preceded falls in SPY of at least 3%. That doesn't sound like much, but it would be the largest drop so far in 2017. A key watch out now is whether NDX weakens further and breaks both its 50-d as well as its mid-May low; if so, then SPY is likely to follow with its first 5% correction since the US election.

Global equities have risen 5% in the past 3 months and nearly 20% in the past year, yet fund managers continue to hold significant amounts of cash, suggesting lingering doubts and fears.

Higher environmental standards and reduced carbon emissions have not harmed the US economy. They have arguably contributed to technological innovation and the advent of new industries and better jobs.

In 1987, the US stock market crashed. Today is not like 1987.

All of the main US indices made new all-time highs this week. The indices appear to be supported by strong breadth, with 7 of the 10 SPX sectors also making new highs. This post reviews several studies that suggest price momentum is likely to carry the indices higher over the next several months and through year-end. That does not preclude an interim drawdown of at least 5% - we regard that as very likely, sooner rather than later - but any weakness has a strong probability of being only temporary.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. That said, housing starts grew only 1% in the past year. Permits are up only 2%. Moreover, employment growth has been decelerating, from over 2% last year to 1.6% now. It's not alarming but it is noteworthy that expansions weaken before they end, and slowing employment growth is a sign of some weakening. Finally, real retail sales excluding gas is in a decelerating trend. In April, growth was just 1.6% after having grown at more than 4% in 2015. Personal consumption accounts for about 70% of GDP so weakening retail sales bears watching closely.

US equity markets made new all-time highs again this week. By Friday, SPX had risen 7 days in a row; that type of trend persistence has a strong tendency to carry the markets higher over the next week(s). That said, the month of June is seasonally weak and there are a number of reasons to suspect it will be again this year, not the least of which is the FOMC meeting mid-month during which markets anticipate the federal funds rate will be hiked for a 4th time. The prior three rate hikes have coincided with notable drawdowns in equities (as well as a fall in treasury yields).

Investors are clearly shifting away from actively managed funds to those based on index strategies. Only time will tell, but this has the look of a durable, secular change in investment management. But much of the perceived threat to market stability of indexing is overblown.

Fund managers have become more bullish, but not excessively so. Cash balances at funds remains high, suggesting lingering doubts and fears. Of note is that allocations to US equities are near their lowest level in 9 years: this is when US equities typically start to outperform.

US equities rose for a third week in a row, to new all-time highs. Trend persistence like this normally leads to higher highs in the weeks ahead. It's true that volatility has dropped to significant lows and that volatility risk is to the upside.

S&P profits are up 22% yoy. Sales are 7.2% higher. By some measures, profit margins are at new highs. Bearish pundits continue to repeat claims that are more than 20 years old: that "operating earnings" are deviating more than usual from GAAP measurements, and that share reductions (buybacks) are behind most EPS growth.

US equities ended the month of April above or near new all-time highs. There are no significant extremes that suggest the trend higher will suddenly end. But the upcoming "summer months" are normally marked by lower price appreciation and larger drawdowns.

Fund managers have become more bullish, but not excessively so. Cash balances at funds remains high, suggesting lingering doubts and fears. Allocations to US equities dropped to their lowest level in 9 years in April: this is when US equities typically start to outperform.

A week ago, a number of notable short-term extremes in sentiment, breadth and volatility had been reached, suggesting a rebound in equities was ahead. In the event, US equities gained 1% and both NDX and COMPQ made new ATHs. But new uptrends are marked by indices impulsing higher as investors quickly reposition and chase price. Momentum quickly becomes overbought. Neither of these has happened, at least not yet. 

US indices closed lower this week, but not by much. SPX lost just 1% and is just 3% from its all-time high. A number of notable short-term extremes in sentiment, breadth and volatility were reached on Thursday that suggest equities are at or near a point of reversal higher. The best approach is to continue to monitor the market and adjust with new data. That said, it's a good guess that SPX still has further downside in the days/weeks ahead.

US indices made their all-time high in early March; aside from the Nasdaq, which made new highs this week, these indices have since moved sideways. SPX has alternated up and down 5 weeks in a row, producing little net gain. Seasonality is particularly strong in April, so a fuller retest of the March highs might still be ahead this month. And indications that 2017 will be a good year for equities continue to add up. But there is a notable set up in place for the first correction since November to trigger. This week is likely to be pivotal.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

US indices have fallen nearly every day since the FOMC raised the federal funds rate on March 15th. There are a number of reasons to expect equities to be at or near a point of reversal higher. A retest of the recent high is likely. That said, it's a good guess that the market's period of smooth, persistent strength over the past 4-5 months has come to an end. Higher volatility and more days with 1% losses (and 1% gains) lie ahead.

A tailwind for the rally over the past year has been the bearish positioning of investors, with fund managers persistently shunning equities in exchange for holding cash. 

Households have 30% of their financial assets in equities, the same proportion as they held at bull market peaks in the 1960s and in 2007. Does this mean another bear market is imminent? No.

The FOMC is likely to enact a third hike in the federal funds rate this week. With economic data continuing to be good, the risk to equities of a rate hike is small. Higher rates indicate continued economic growth, so equities, commodities, the dollar and yields generally respond positively. However, the recent picture is more mixed: in particular, the dollar and yields have sold off after rates have been hiked. This was not the consensus' expectation, nor is it this time. Is another surprise likely now?

2017 is off to a remarkably similar start to 2013. No two years are ever exactly the same, so there's no reason to suggest that 2017 will repeat the 30% gains achieved in 2013. But many of the technical and fundamental similarities between these years suggest that 2017 may continue to be a good year. There are two watch outs, however, that make 2017 much higher risk than 2013. It's also worth recalling that equities fell 3-8% at six different points in 2013. Expecting 2017 to continue to ride smoothly higher will probably prove to be a mistake.

All of the US equity indices made new all-time highs again this week. Treasuries were the biggest winner. A drawdown of at least 5-8% in SPX is odds-on before year year end, but there are a number of compelling studies suggesting that 2017 will probably continue to be a good year for US equities.

US equities continue to make new all-time highs each week, supported by strong equity fund inflows and macro data that has exceeded expectations. Surprisingly, equities outside the US are actually outperforming the S&P. The current trend is very extended and there are four notable headwinds that may impact equities in the weeks ahead. There is, conversely, a favorable set up in the bond market.

Optimism towards the economy has surged to a 2-year high. Cash remains in favor (a positive) but global equity allocations are back above neutral for the first time since late 2015. Another push higher and excessive bullish sentiment will become a headwind.

In the past year, S&P profits have grown 46% yoy. Sales are 4.5% higher. By some measures, profit margins are back at their prior highs. This is a remarkable turnaround from a year ago, when profits had declined by 15% and most investors interpreted this as a sure sign that a recession and a new bear market were underway.

Investing always involves some risk. Right now, US macro is not one of them.

Global equities are nearly 25% higher than in February 2016. A tailwind for this rally has been the bearish positioning of investors, with fund managers persistently shunning equities in exchange for holding cash. That's no longer the case. Optimism towards the economy has surged to a 2-year high.

US equities are starting the year at new all-time highs. The rally is supported by healthy breadth and a relatively solid economic foundation. The biggest watchout is volatility, which has fallen to an extreme. A mean reversion in volatility is odds-on and that is normally unfavorable, short term, for equities.

Bond yields usually rise as the FOMC raises rates. This is one of the mostly strongly held consensus views in the market right now. A year ago, investors also thought yields were set to rise; instead they fell over the next half year. Might investors be wrong now once again?

Global equities are more than 20% higher than in February. A tailwind for this rally has been the bearish positioning of investors, with fund managers persistently shunning equities in exchange for holding cash.

Employment growth is decelerating, from over 2% last year to 1.6% now. Housing starts and permits have flattened over the past year. There is nothing alarming in any of this but it is noteworthy that expansions weaken before they end, and these are signs of some weakening that bear monitoring closely.

A year ago, profits for companies in the S&P had declined 15% year over year (yoy). The consensus believed this signaled the start of a recession in the US. How has that dire prognosis worked out? In a word: terrible.

Manufacturing output is at an all-time high. Manufacturing employment is at a post-industrialization low. Deregulation, dollar devaluation and protectionist/isolationist policies will not resurrect manufacturing employment.

The US economy will soon be in its 8th year of expansion. The US will also have a new president next year. So, is a recession a certainty in 2017? No. Economic expansions don't die at a predetermined definition of old age, and changes in the presidency have not been a useful predictor of a coming recession. The danger in forecasting based on these things is that it makes an imminent downturn appear to be a fait accompli. It's not, and believing that it is closes your mind to other possibilities. Maintaining a mind open to changes in the data and the opportunities they present is the essence of successful investing.

Fund managers' inflation expectations have jumped to the highest level in 12-1/2 years.

In July, fund managers' had their highest exposure to bonds in 3-1/2 years. In other words, they expected yields to keep falling.

Demographics is a key driver of economic growth. Most people focus on the aging of the Boomer generation. But the working-age population in the US has been growing almost as fast as the retirement of Boomers.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. That said, there are some signs of weakness creeping into the data. Retail sales are at a new all-time high, but overall growth is decelerating and less than 2% real. Employment growth is also decelerating, from over 2% last year to 1.7% now. Housing starts and permits have flattened over the past year. There is nothing alarming in any of this but it is noteworthy that expansions weaken before they end, and these are signs of some weakening that bear monitoring closely.

Investors have become very concerned about excessive debt in the US. The worry is that current leverage has risen so rapidly and become so extreme that the economy is at imminent risk of a crisis. Is this concern valid?

Global equities are more than 15% higher than in February. A tailwind for this rally has been the bearish positioning of investors, with fund managers' cash in October rising to the highest level since 2001. Similarly, their equity allocations are now like those in February, mid-2010 and mid-2012, periods which were notable lows for equity prices during this bull market. Overall, fund managers' defensive positioning supports higher equity prices in the month(s) ahead.

The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.