Monday, January 30, 2012

Risk Assets/ Credit vs the SPX

I haven't updated our R.A./Credit layout in a while, I meant to Friday as a move in credit was highly suggestive that the market would see some downside this week. Lets start with Sector Rotation first as it may make some of the following charts more useful.


 On a longer term basis, you can see Financials at the bottom in green coming in and going out of rotation, as noted over a week ago. Tech seems to be at a critical point as well where it may be maxing out in rotation, Energy has certainly struggled, and those are our 3 most important market industries.

Over the last 2 days, Financials have fallen off hard today, indicative of a more risk off environment. Utilities saw some early strength, also risk off as they are defensive, as well as health case and staples, all defensive. Energy is clearly under pressure from a declining Euro (especially from Friday's levels). Industrials have fallen off which makes sense given the Dow's performance, even as the most defensive of the 4 main averages. It should be noted that the Russell 2000 is today's biggest laggard and thereby the biggest indication of a risk off mood.

Of the 3 most important groups, Tech is the last holdout and why the NASDAQ 100 is the best performing of the averages today, largely being supported by AAPL.


 Intraday commodities are underperforming the SPX.

 As you can see in a risk on environment such as what we saw during 2010's QE2, commodities (brown vs the SPX green), a risk on asset, tracked the SPX very well, they also topped first in 2011and led the way to late July's plunge. We have seen major trouble since the fall of last year in commodities, which led us to believe there was a slow down brewing in China, a few weeks later, data confirmed manufacturing and services had entered contraction, making FXP an interesting play on Chinese weakness. There's more bad news out of China that I will cover later, we may have some individual names that are worth a look rather then the broad FXP. Right now there's a strong dislocation between equities and commodities, not a healthy market as you can see compared to the past.

FXP...
 A bullish wedge in FXP, the rule of thumb, "Wedges retrace their base". However we also may get a gap fill making FXP a decent quick swing trade if we can get a better risk profile entry.

FXP showing accumulation, so any pullback should have more then enough support to make an FXP swing trade (maybe longer) an attractive play.


 Above are rates (red) vs the SPX (green), rates act like a magnet for equities, as you can see on Friday rates hit multi-decade lows and the market soon followed, they are posting a new low today and diverging from the SPX intraday.

 A little longer view of rates vs the SPX, note they topped  in white followed by the SPX topping in yellow, however rates are still leading much lower.

 Long term, there's a severe dislocation between the two and one of the reasons  believe the market has been in an exceptionally dangerous position recently. Again, rates led the July market sell-off as well as the initial October rally top.

 The legacy arbitrage correlation between the Euro and the SPX is fairly clear here.

 In Green during the fall, they were correlated very well, that correlation has dislocated (I do not believe it is broken) over the same period in which the market has looked very dangerous, the correlation would suggest quite a bit of downside for the market. The Euro (orange) is also at a resistance level marked with a white trendline.

 Here is Friday's move in High Yield Corporate credit (credit leads, equities follow), it was selling off all day (much like the ES VWAP chart from last night's post), but especially in to the late day pop on Friday. The result...

 Here's today's drop.

Here you can see my custom financial momentum indicator in red and where financials really started to go out of rotation. With nearly 1/4 of the SPX weighted with financials, it can't go far without them.

As the sector rotation charts showed, Energy and Financials are starting to come unglued, it's just a matter of tech now. As I mentioned in last night's post, with investor sentiment so bullish, I would think Wall St. will want to take advantage of that before sentiment shifts, which in my view would require a pretty fast and nasty downside move.

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