Credit/Risk Indications

For newer members we watch the credit markets which are much bigger then the equity markets and tend to lead equities, where credit goes, equities tend to follow. We also watch other risk assets as a risk on rally in equities should have broad support from the credit markets and risk assets like commodities, when there is a dislocation (for instance the S&P rallies, but credit and risk assets don't participate, we have a good idea that the rally will fail and that is a dislocation, often a good area to short in to strength or buy in to weakness as it works both ways).

 Here are commodities vs the S&P-500 this morning (the comparison symbol S&P-500 will always be green on these charts). Commodities were in line with the market until the 10:30 EIA report when Crude spiked, there is a slightly bullish intraday dislocation as commodities are showing better relative performance, this may signal a bounce, but the moves in crude/USO will have a lot of influence on this chart.

 For a longer term perspective (dates are at the bottom of the chart) you can see 1 bearish dislocation to the left in the red box as commodities, a risk asset, didn't follow the S&P-500 higher, shortly after that the S&P corrected to the downside. In the most recent bounce commodities have severely underperformed leaving a severe dislocation. Part of the reason for commodity weakness (which we speculated about well over a month ago and before confirmation) is weakness in China, a few weeks later we got confirmation in both China's services and manufacturing PMI, both which came in below 50 which signals contraction, thus commodity weakness and our affinity for several commodity oriented shorts including VALE. The S&P should revert to the mean and move lower as you can see, it usually does on these dislocations.

 This is commodities vs the Euro in green, note that they were tracking well as they should until the 10:30 inventories report.

 This is High Yield Credit vs the S&P and yesterday we noted a sell-off in High Yield which was a hint that the LTRO may not go so well today, thus far today, HYC is pretty much in line.

 Here you can see a little longer perspective in which the S&P bounces, but High Yield Credit is selling off, this is bearish for the market.

 Rates are a bit higher in the early going, again suggesting a possible intraday bounce.

 Longer term equities/stocks are attracted to rates like a magnet, you can see in the white box that rates were bullish while the S&P was still tracking lower, this was a hint that a rally was coming, then the first dislocation in red sent the S&P down in a sharp move, currently there is another dislocation.

 The market this a.m. is tracking the Euro pretty well, there's a pretty strong correlation between the two.

 Over the last day and a half, the Euro has underperformed the S&P.

 However longer term there is a severe bearish dislocation between the Euro and the S&P. Each EUR/USD has a rough correlation of 2 Dow-30 points, so there's quite a bit of potential downside here.

 High Yield Corporate is in line with the S&P this morning.

 This is financial Industry momentum vs the S&P, over the last few days you can see at the white arrows where momentum in financials picked up and preceded a move higher in the S&P. Also at the red arrow you can see financial momentum started failing and preceded a move lower in the S&P. Right now there's a slightly positive bias.

Longer term financial momentum was in line with the S&P at the start of the October rally, near the top, there was a bearish dislocation and shortly after a sharp move down in the S&P, right now Financials are still dislocated and underperforming the S&P.