Today stock market broke out to new year to date high. All components of our model with the exception of three would dictate a more positive stance. Here are the three exceptions:
Recently US Stock Market has been remarkably correlated to US $; weaker the dollar, higher the stock market. Today as the sock market broke out to new highs, the dollar did not. This is setting up a serious divergence .
US money supply is not increasing, whereas money supply in the rest of the world is increasing sharply. This sets up conditions for a short term rally in US $. If the recent correlation persists, a rally in dollar will lead to lower stock market.
Fund flows in stock market reached a very high level. Our proprietary money flow indicators show euphoria. Our research shows that when our money flow indicators reach such extreme levels, probability of a reversal is very high.
We would like to remind our readers that the objective of our model is to generate alpha, i.e., extra risk adjusted return. With the emphasis on reducing risk, our allocation model stays unchanged even with the market making new high.
