Disequilibrium

Another day, another equity rally.  The SPX has managed to take its year-to-date loss below 5%, and while most other major indices have fared rather worse by comparison, the feeling that we've stepped away from the brink is palpable.  Spooz are now at a fairly critical level; a sustained break of 1950 would confirm not only another double-bottomed W formation, but also represent a break back above the 50 day moving average.

The feel-good factor isn't confined to equities, however.   Iron ore has quietly put in a 25% rally over the last six weeks or so, and while it is still light-years away from its previous lofty heights, that nevertheless represents the highest price in five months.  Attributing the rally to Chinese demand seems obvious, though as one old friend noted yesterday, determining exactly why the Chinese would snaffle iron ore is a little more problematic.  Embarking on a 2009-style commodity investment orgy would appear to be problematic, both because of the dubious impact it would have on economic output and its apparent contradiction to the regime's long-stated goal of re-balancing the growth model.

In any event, it's another datapoint to suggest that the deflation may not have quite as firm a grip on things as some may have feared (or hoped.)  The irony, of course, is that in stepping away from the brink of deflation, at least in the United States, we draw the Federal Reserve back into play.  And that, with its concomitant implications for financial conditions, is hardly an unalloyed positive for US equities.  It's a reason to expect a broad range to hold in the S&P, as we flit between bad nominal growth/easier money and higher nominal growth/tighter growth regimes, neither of which represents a stable equilibrium for US equities.

After the recent data releases Macro Man ran his US equity model to get an early read on the February output.   Imagine his surprise when he saw the forecast dive quite a bit lower!  There are a couple of reasons for this which astute readers may be able to fathom, but given the success that he's had with the model over the past eight years, he takes any abrupt changes quite seriously.

In an absolute sense, the forecast is still quite high, mind you.  Still, there's been an evident deterioration in the underpinning of the "equities going up forever" religion; one of the factors in Macro Man's scorecard model flipped negative in January and has evidently stayed that way this month.

Neither of these models are suggestive of an immediate requirement to sell equities; indeed, both are consistent with ongoing length, albeit at levels somewhat lower than maximum size.  And that's probably fair, given the competing disequilbria noted above.   Ultimately, 2016 may go down as a stock- or sector-picker's market rather than a notable bull or bear on an index level, at least in the US.  Given that that sounds a lot like 2015, perhaps disequilibrium is the new equilibrium in the US...