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Equity markets achieved record highs in recent weeks, but market participants have been calling for a pullback along the way. With the Easter holiday and looming Non-Farm Employment Report on Friday, volume could be light and the markets could see a pause. Last month's employment report was strong, and expectations have risen for the March numbers, but with upward revisions come the increased chance of negative surprise. As was seen with the manufacturing numbers Monday, activity fell to 51.3 missing the expected read out of 54. It would not kill the intermediate trend to see a slightly negative surprise on Friday, but it would provide a catalyst for correction. The intermarket macro picture signals the market's defensive stance following the equity's recent high.

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Above is a chart of the treasury credit spread. The long term bond (TLT) is in the numerator and the short term note (SHY) is in the denominator of the ratio. This pair trades opposite of risk assets and when it strengthens, it signals a flattening of the yield curve. As equities have approached their highs the pair has turned up, showing a more defensive preparation. It has broken a 4.5 month trend line, and could signal a short term pullback of risk.

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The next indicator, pictured above, is a measure of market breadth. The equal weight equity index (RSP) placed over the weighted equity index (SPY) shows when a majority of the components are outperforming. The outperformance is not necessary for equity indexes to rise, but indicates strength of the overall trend. As is seen over the previous few months, the market move was widespread. However, since February, the markets have traded sideways. Equities have continued to reach new peaks, but the lack of full market participation makes for a greater chance of upcoming market correction.

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The last indicator that signals defensive positioning is that of a select dividend index (DVY) over the equal weight equity index that was seen above. This indicator correlates negatively to risk-on appreciation and usually shows leadership to market downturns. The dividend index is comprised of mostly utilities, industrials, and consumer defensives, as seen in the chart below. The market looks to be taking cautious positioning with its sector rotation into defensive funds and thus making a case for short term market weakness. The price action shows a breakout of the multi-month trading range. In the weeks leading up to Q1 earnings announcements, look for profit taking in outperforming sectors, and movement into the more defensive sectors like Utilities (XLU),Consumer Staples (XLP), and Health Care (XLV).

Source: Global Macro: Equities Turn Cautious