Credit/Risk Asset Update

I think this layout has been one of the best, most innovative set of indicators we've added to our tool box, furthermore, I think if you ignore the signals here, you are doing so at your own peril. This layout is flashing bright red flags, not the kind that suggest a correction, but the kind that suggest something very ugly is going on beneath the surface where few traders look. As always, what the crowd knows, isn't worth knowing.

 Commodities today seem to be in line with the SPX's performance (SPX is always in green).

 As you can see yesterday, they had no interest in taking part in the SPX's move and remained at the Friday drop lows. This is why we use these charts, they are forward looking, not lagging indicators. A risk on rally should see risk assets like commodities perform, when they don't you see what happens.

 Taking a very long view back to 2010, look how commodities were in a risk on mode with the market at the green arrow, then toward the 2011 top, commodities diverged, they warned that it was a top, they warned before the 16% late July plunge and right now they are at the worst divergence in years, they are warning of something that probably very few of us can appreciate. It may be of benefit to go back and read my Bear Market Rally post from Feb. 5th 2012, the archives are at the right side of the site about half way down.

 High Yield Credit is showing worse relative performance then the SPX today. It gave a warning late yesterday.

 Since the NFP on the 3rd, look at what has been going on in High Yield Credit. Again, this is a RED FLAG.

 Rates, "Equity's magnet" are in sync intraday with the market.

 Over the last few days, since last week through today, they are warning as well, they failed to confirm the market's move up yesterday.

 Longer term, rates warned of the 2011 top and it's break in late July. Right now, they are worse then ever.

 Since 2009, they called the bottom before the market bottomed, called the 2010 consolidation, the 2011 top and are making new lows in this area, in fact historic new lows.

 This is a conversation for another day, but I have mentioned that I believe we will see the first secular bear market in equities of our generation. Note the years on the time frame below.

 For those who still don't think the FX correlation is alive and well, the Euro/Dollar warned yesterday as the market was near its highs. Today the Euro is still underperforming the SPX, another warning.

 Over the last week or so, the Euro called a bottom before equities at the white arrow, again at the white box for yesterday's move and several declines as the market "appeared" strong.

 Longer term, the dislocation is huge, you can see the Euro/FX called the July drop, the October rally highs, and now it is more divergent then ever. This, along with everything else we have seen, strongly suggests this is indeed a bear market rally setting up the bulls for a major fall.

 This is High Yield Corporate Credit, on the 10th, High Yield Credit made the biggest 1-day drop since November. It hasn't added a higher high in weeks and is moving toward new lows.

 Financials are under-performing today, as they warned late yesterday.

 In the white box, financials led the market higher with out-performance, they warned last Thursday before Friday's decline, they warned again yesterday and are now moving to new Post NFP lows.

 Intraday, you can see financials are one of the worst performing industry groups.

If we look at all major groups today, again we see very defensive trade with Financials, Basic Materials, Technology notably, all lower, the only risk on sector performing is Energy. The defensive sectors are in rotation, Healthcare, Utilities, Staples and Industrials to some degree which I assume is a move toward blue chip names.

I borrowed this chart as I can't afford a Bloomberg terminal, but since we have been talking about it the last several days...

Here's the divergence between European Financial Credit and Equities (credit in orange). The Credit market is bigger, it's where smart money plays, not retail and Credit almost always leads equities as smart money is making moves there while equities look like they are just being set up.