Having read The Economist leader on markets being a bit decoupled from macro economic realities (see here: http://www.economist.com/news/leaders/21570724-world-economy-improving-not-much-some-investors-seem-think-semi-rational, and the statistic that UK listed firms have issued the most profit-warnings since 2008, one may be cautious.
I wanted to have a look at a few pieces of data to check whether there was some risk of a market consolidation.
1) Macro data improvement seem to be somewhat stalling.
Citigroup US economic surprise index
As indicated above, the pace of economic surprises is receding. Despite some positive employment data, other areas of the economy are somewhat stalling such as housing (starts and new home sales). The UK GDP for Q4 disappointed slightly. French manufacturing PMIs keep sinking. Only Germany seems to be stabilising.
2) Currency wars ragging
Japan has decided to sink its currency to create an inflation shock. This will have consequences as their export firms will gain market share abroad if they choose to cut prices.
This will impact mid-range industrial companies in Asia (Korea, Taiwan) and Europe(France and Italy)
Yen versus dollar - the recent weakening is statistically significant
It is likely that we see in the coming quarters some margin pressure on industrial firms.
3) Equity markets are already up 17-30% since the June 2012 trough
When you look at historical patterns for the European indices, it is rare to see them going up more than 20% in a straight line and continuing their progress.
The last occurrence was in March-May 2009 but European equities had declined by 60% previously. In June 2012, European markets were down 12% from the previous year, not in bear market territory.
Unless we qualify the November 4% decline as a consolidation, it is quite unlikely we will see the European index continue up 10% from here without some significantly positive news on the macro or political front. 4) Politicians are back on the spotlight
The UK PM wants a referendum about the EU membership. The Italians are voting for their general elections in a few weeks. In Germany, Angela Merkel may not win in September after the junior coalition partner FDP underperformed in a local election. France is still meddling with their 75% tax rate.
In the US, Obama pronounced a partisan speech while the Japanese government is provoking a military escalation with China.
Quite amazing developments in a few weeks!
5) Seasonality
This one indicates some headwinds in January - that we have not had yet
6) Press articles calling for a top
For instance The Economist as quoted above. This may be seen as a contrarian positive indicator though.
7) Strategists calling for a bond to equities switch
This is the key conviction of most strategists for 2013. If they act on their prediction, then there should be a significant support to performance. However, this is a medium to long-term trend while we are here discussing the short term.
Our conclusion
It seems that the current mood is a bit too optimistic and I would keep some cash to reinvest at a lower price in the coming weeks.
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