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5 Reasons To Remain Cautious On U.S. Equities

 January 23, 2013 03:35 PM


US equity markets are touching multi-year highs as investors increasingly allocate to the risk-on trade. But there are a few signals that may indicate some need for caution - at least in the short-term:

1. As discussed earlier (see post), consumer sentiment remains quite weak, which could easily create headwinds for corporate earnings.

2. Energy prices have been on the rise, with WTI crude oil at the highest level since September.

3. Regional manufacturing data isn't showing much improvement. The Richmond Fed index came in significantly below expectations.

Richmond Fed Manufacturing Activity Index

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What's particularly troubling about this index is that the component tracking manufacturing output prices declined while input prices rose. Not great for margins.

Richmond Fed Manufacturing Activity Index

[Related -In Denial: We Pursue Endless Growth At Our Peril]

4. At the national level, activity remains subdued. The Chicago Fed National Activity Index came in below expectations. It means that economic growth is still fairly weak.

Source: Econoday

5. From a technical perspective, the world all of a sudden turned bullish. According to Merrill Lynch, investor "cash allocations fell to the lowest level since February 2011" and "allocation to bonds fell to lowest level since May 2011". We may not yet be at a level professionals would view as a contrarian signal, but this should certainly signal a need for caution.

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