We follow credit and other risk assets to judge the viability f a rally and in other cases, to tell us when a rally is coming before the market shows us or as confirmation. The credit markets are much, much bigger then the stock market, therefore credit often leads and the stock market eventually follows. We look for disconnects between credit and broad risk assets like commodities (which should all rally together with stocks in a healthy rally) and the S&P-500 to tell us when a rally or bounce isn't as strong as price would make it appear, this disconnect can often be used to short stocks on strength to get better positioning as stocks almost always revert to the mean of credit/risk assets.
Commodities are selling off a bit this morning...
Long term you can see commodities leading the market in the white box, in the red box they are lagging the market badly, this is a disconnect between risk assets (commodities and stocks).
High Yield Credit is also selling off this morning.
Longer term you can see what the disconnects between High Yield Credit and the S&P produce, quick moves down. Right now there's a pretty severe disconnect in credit.
Yields/Rates act like a magnet for stocks, here we also see yields taking a plunge. It seems something is going on in the risk markets that is not yet reflected in the equities market, of course equities are in the period of Q4/Year end window dressing until tomorrow.
Longer term you can see how yields predicted the October rally with yields making a higher high while equities were still making lower lows. There have been several dislocations since then, each has had a sharp move proceed it, currently there is a bad dislocation as well.
The Euro was largely in lock step with the market this morning as it should be, but has shown a little relative weakness recently.
Longer term the relationship between the Euro and Stocks has predicted the late July fall in equities, the early August bounce and now s severely dislocated from equities.
Most surprising is the sell-off in High Yield Corporates today versus the S&P, this is quite a move for this type of credit.
Financial momentum is still lagging relative to the market on an intraday scale.
Long term financial momentum predicted the rally in white by making higher highs while the market was still selling off, there have been several bearish dislocations that have led to quick sell offs, there remains a dislocation presently.
CONTEXT is not as detailed as our risk models, it is an amalgamation of credit and other risk assets in to a single model, right now the ES futures 9S&P E-mini) are dislocated and much more bullish then risk assets in the CONTEXT model, this is not bullish for the market, the model confirming ES would be bullish for the market.
ES much higher then the Model suggests it should be. Below is the extent of the difference between what the models predict ES should be at based on other risk assets and where the two actually are, when it is in the red it is bearish, when it is in the green, the model is higher then ES.
Again, it seems that the credit markets better understand the dynamics of situations like the ECB deposit facility and the broken hopes of the ECB's LTRO program much better then common equity trades and there are behind the scenes moves in credit reflecting a risky market environment.
No comments:
Post a Comment