M1 and M2 have been dropping of late. The Bloomberg Financial Conditions Index has dropped below zero, BBB spreads have risen a little and the Fed balance sheet has contracted a little. Added to worries about QE exits, this all means that the liquidity picture is looking shaky. The other indicator that is clearly bearish is the AAII sentiment survey, which registered a very bullish reading (for the crisis, in any case) before falling somewhat last week.

So although momentum is positive in equity markets, liquidity may be turning and sentiment is bullish (a bearish sign). Valuations are not cheap. Obama reforms will be months away, if they ever happen, but a “tougher regulation” narrative could make financials valuations look extended. The final factor is the economy: the leading indicators point to ongoing recovery, but the markets have expected that recovery to be strong — it is likely to be weak, and the Citigroup Economic Surprise Index has drifted back below zero, indicating that the numbers we are getting are priced in — and leading indicators are artificially high because last year’s falls are confusing seasonal adjustment systems.

Conclusion: Markets have been driven up by liquidity and the strong economic numbers. Those may now both be turning. A strong recovery appears to be priced in. I think a potential turn in liqudity is enough to argue for a lot of caution, although the picture is not negative enough to argue for a short on equity markets and I may be making too much of a meal of fluctuations in the data.