Credit/Risk Assets

The reason we follow these is because credit tends to lead the market and risk assets should rally with a risk on rally in equities. When that doesn't happen, we get dislocations and the market usually corrects, in this case to the down side, and sometimes quite violently.

 Commodities have tried to keep up with the s&P as it filled the gap, but they remain severely dislocated as the longer term chart below shows. This also has been the basis of our theory of a weakening China, and we saw this probably a few weeks before China's PMI numbers confirmed what commodities where telling us.

 Longer term, commodities are virtually running in the opposite direction compared to the S&P, not a good sign and this is why I consider this bounce to be one that can be used to add to shorts or initiate new ones so long as you are aware of the volatility possible during Friday's EU summit, which may produce a short term photo-op sugar rush, but if the EU could figure out how to make 2+2=4, they would have done so by now.

 Yields are moving lower today, equities gravitate toward yields.

 Longer term there's been two serious dislocations between yields and the S&P, the first saw a nasty drop, I imagine this time shouldn't be too much different.

 The Euro which has a historical nearly 1.0 correlation with equities (so long as QE is not underway) remains severely disconnected from the S&P-500.

 High Yield Corporate Credit has not been as excited compared to equities, there have been several recent dislocations like this one that have all led to downside in the S&P.

 XLF had some momentum this morning in filling the gap, but...

Longer term, not able to keep up with the broad index.

As for the European close,
High Yield European Corporate Credit lost ground all day today, despite the European gap up on the open (a European dislocation and apparent flight out of risk).  EU Financials lost ground as well swinging from their highs to their lows.  There was a signifiant move out of low quality credit and in to higher quality credit (another safe haven trade as traders deleverage risk and move to safer environments.) EU sovereign yields shot up higher, there was a late day bounce on news of an ECB intervention in the secondary markets (buying up debt to try to stabilize yields from moving even higher). Commodities also lost ground, I believe this is not only a sign regarding the risk trade, but a larger sign of problems in China.

Finally CONTEXT gave up support for the move in ES toward the end of the European session.

You can see CONTEXT decoupling from ES as they were largely in lock step.

All in all, from Europe to what we have seen in the US thus far, (although I still need to look at several industry groups), it appears evident that the appetite for risk is diminished and I believe that started yesterday with the head fake move above the triangle noted, which allows for short selling at better pries and remains a highly predictable weak point in technical analysis which Wall Street has long ago adjusted to, but technical traders still don't get it after nearly a decade.

Should my long term hypothesis of a first ever secular bear market come to fruition, these trader are going to have no idea how to trade it as they can't even adjust to the typical technical pattern head fakes. It's so pathetic that there's actually free software that will dig up whatever technical pattern you are looking for, now imagine what Wall Street is using to run these head fakes, not the least of which includes a fully open order book (which is why all my orders/stops are mental until I place them).