The market's price is driven by two things and if you can recognize these two things on a chart and understand how they work, you will have gained more from a simple price chart then any new "Holy Grail' indicator.
What are they? Supply and Demand? Sort of, but supply and demand are driven by FEAR and GREED and that is the market in a nutshell, that is what price charts ultimately are showing you and when you can see price charts in emotional terms, you have found the best use for them. Why do stocks with good earnings and guidance sell off? Sentiment, it's not about what they did, but the emotional sentiment of the market moving forward.
These charts along with 3C have been so dislocated from the market and the rally has been so persistent, that many people felt like the correlations just don't work anymore. I have said since December and haven't wavered on this, I believe we are seeing a historic bear market rally that is going to do some major damage and thus the correlations are not broken, they are just showing the extent to how dangerous and how much trouble this market is in. I once quoted one of the world's greatest stock traders, Jesse Livermore, "It's not being right on the market that made me money, it was the sitting that made me money' He went on to say that a lot of people were right on the market, but essentially, they couldn't withstand the emotional extremes the market goes to to knock you out of positions and change your opinion. What Jesse was saying was he could be right about the market, but if he couldn't "sit" and wait and show the courage of his convictions, he wouldn't have made money.
So lets take a look at the big picture in our Credit/Risk Asset Indicators. You might want to book mark this post for future reference.
Commodities, you have seen this chart many times, but it's always worth posting.
Commodities vs the SPX (green) the correlation between risk assets (commodities and equities) worked fine in a real risk on move in 2010, commodities then gave a negative divergent signal at the 2011 top and again at the July 201 top before the market lost 16-18% in a waterfall sell-off, commodities stayed in sync with the market until December, we knew this had something to do with China, but as a risk asset, they should have rallied, they didn't. So is the correlation broken? I don't think so, I think it's just difficult for people to see the market move up for 3 months non stop and see commodities so badly dislocated, a reversion to the mean in stocks would suggest a major fall in the market and as I showed you yesterday, dumb money sentiment is at bullish extremes, these are the people who have been shown historically (through hard data) to be wrong. If anything, I think this shows just how bunk this rally has been, but that is the job of a bear market rally, to be convincing and draw money back in the market and then leave them holding the bag. Look at the Dow today- a month of longs holding the bag in one opening gap.
Look at the trend in commodities, it's a primary bear market with a recent flag, I pointed this flag out last night.
I said commodities couldn't make it to the upper channel at the yellow arrow, they posted an ugly closing candle yesterday and warned, watch for a break of the channel, we have that today. That doesn't mean that we won't see volatility shakeouts, we may, it depends on the market and when it breaks, which I believe it already has, it's like my snake analogy, you can cut off the head and the snake IS DEAD, but the body will continue to move and if you didn't realize the head was missing, you may mistake it for still being alive.
If the commodity/SPX correlation is dead, then you don't want to look at this intraday chart because they are perfectly correlated.
Here's one of our ideas to trade commodity weakness by targeting the biggest commodity importer, China. If there are problems in commodities, there are problems in China and FXP since the trade idea has now gained +14% (note the positive RSI divergence). I think FXP can pull back and fill some gaps, but the price implied target based on the wedge, is a lot higher as wedges typically retrace their base ($40 area target?).
This is what they say on Wall Street, "Credit leads, equities follow"meaning Credit is a leading indicator. High Yield hasn't made higher high with the market since Feb 3rd, that's a big red flag.
Here credit warned yesterday with a divergence
As far as the long term and credit being a leading indicator, it caught the 2010 lows and headed up before the market bottomed, it called the July decline and it is now divergent and dislocated from equities. It's had a pretty good track record calling major turns, should we believe this time it is broken?
Yields are like a magnet for the market, longer term they called the July sell off before equities, they called the October bottom (as did 3C weeks in advance) and now they are at the worst divergence I can find since inception of FVX.
Here we see they haven't made a higher high with the market since Jan. 23rd. which should call in to question this rally. Is this a real risk on rally or a bear market trap? You know what I think.
Is the correlation broken? Intraday today you can't tell the difference between Yields and the SPX.
The Euro/$USD correlation is broken, I've heard this so many times. I agree during QE1/2 it didn't work well, but we aren't in QE now. The dislocation here is sharp, for every EUR/USD pip, there's about a 2 point Dow correlation, that suggests a lot of Dow downside just to revert to the mean assuming the Euro doesn't fall more and assuming the market doesn't overshoot to the downside the way it over shot on the upside.
Recently the EUR called a negative divergence with the SPX, look at the results.
Intraday, does this correlation look broken?
In green we have High Yield Corporate Credit vs the SPX in red, Credit has ben decimated this week. Look at the lows in credit (green trend line) vs the lows in the SPX (white trendline). Credit is selling off a lot harder then equities, thus far, remember they are a leading indicator.
Corp. Credit also broke support today and in 5 days, took out well over a month of long positions.
This is Corp. Credit vs the SPX on a 5 min chart. Note the divergence and the effect of it on equities and that is just a small one.
The intraday chart...
XLE/Energy momentum vs the SPX, also a divergence and red flag leading the SPX lower.
Intraday there's a little better momentum in Energy then the SPX at time of this capture.
Energy on a daily chart, note volume rising as it should as XLE went higher, then in yellow, a top formation, in orange, a typical triangle topping pattern, but these almost always get head faked, and this appears to be one large head fake. When XLE moves below the apex of the triangle, look out below, there's serious potential for a water-fall sell off as there are too many longs that are holding and they'll be hit with large losses causing XLE to fall faster.
Look at Financials/XLF, look at the volume on the rally, a dead give away of a problem. Financials are also divergent with the market. Also note the ascending wedge that according to technical analysis should have broken down at the apex, just as I said yesterday, we see these head faked all the time with an upside breakout, longs buy and we get sideways movement until the pattern fulfills itself and heads down. To make matters worse, traders would have shorted the bearish ascending wedge, when it broke out, TA tells them to buy it as it is a failed patter, it isn't, it's Wall Street manipulation of technical traders.
XLF intraday vs the SPX.
Tech momentum intraday vs the SPX.
And why? Look no further then AAPL outperforming the market.
Take note of the sector rotation from yesterday, this is relative performance vs the SPX.
Now look at yesterday and today, Financials , Energy, Basic Materials & Industrials all rotating out, Defensive sectors like Healthcare, Staples and Utilities are rotating in.
I hope we can come back to this chart in 6 months.
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