- The Fed wants to party. The dose of liquidity effected by the Fed is inducing speculative activity into risky assets. The Inflation-Deflation Timer Model uses commodity prices as the canaries in the mine and those canaries are chirping quite happily. These readings indicate the "inflation" or high beta trade of commodities, commodity producers and emerging market equities. A tour around the world of global equities confirm the uptrend. Virtually all developed markets are either in constructive uptrends or have broken out to new recovery highs.
- Overly bullish investor sentiment points to correction. I continue to be concerned about excessive bullishness in investor surveys, as well as option sentiment readings. Given the strong momentum exhibited by global markets, this suggests that any weakness should be viewed as corrections and opportunities to deploy new cash rather than an intermediate term top.
- Be cautious about macro risks. Numerous macro risks are evident: US municipal defaults loom. European sovereign risks could sink the banking system. China could miscalculate and tighten itself into a hard landing. For the time being, however, any problem is more likely to manifest itself in the 2H.
Given the powerful momentum shown in the markets, I suggests that traders stay long risky assets but maintain an appropriate risk control discipline in order to allow winners to run and limit downside losses.
For a full summary of my macro views, see this.