Risk Asset Update

Most traders look at the market and are moved emotionally and make decisions, come to opinions and conclusions based on intraday trade or trade over a short period of time, like a day or a few days. These same traders also trade in 100 lots. Wall Street/Smart Money/Institutional money has a much different view, a much longer view (we have seen the cycles they set up numerous times), they trade in size most of us can't even contemplate, even the market makers and specialists-forget the HFTs. There's a fundamental disconnect in that issue alone as far as retail traders understanding Wall Street, they trade totally different, they look at the market totally different. To beat the market, you have to understand Wall Street, yo can't do that by watching every tick or daily close, Institutional money thinks in terms of their quarter or year, not their day.

This layout looks at risk assets that "Should" trade with the market (SPX in green is the comparison symbol unless otherwise noted), when there are divergences in these assets, it is a clue or a piece of the puzzle that helps us understand what's going on in the market and where likely reversals will take place or confirm a price trend.

 Since last Thursday (the accumulation day) commodities have tracked the SPX pretty well, if you look at USO and recent resistance it broke above, I think that explains why in part.

 A longer view shows that commodities as a risk asset have not been excited like stocks have, in fact they are dislocated pretty badly. Typically there is a reversion to the mean.

 The $AUD is one of my favorite currencies as a leading indicator when it diverges with the SPX, it has been in line for a while, just yesterday it negatively diverged for the first time in a long time. Today intraday it seems to be showing a little worse relative momentum.

 The Euro today, what a dislocation, perhaps GS is done selling Euros after their long Euro call last Thursday-the accumulation on Thursday is interesting as well, I doubt it is a coincidence.

 The Euro/SPX which have a positive correlation (the $USD has an inverse correlation) trading together since last Thursday, today the Euro is dislocated for the first time in the trend, interestingly a few days after the market breaks above obvious resistance and the day after the R2K breaks above resistance.

 Credit markets are huge, much bigger than stock markets and they are where the real smart money is, so when a risk asset like High Yield Corporate credit negatively diverges from the SPX, it's time to pay attention. As always, as they say, "Credit leads, stocks follow".

 The same HY credit, which is a VERY liquid form of credit is seen on a longer term, it didn't make a single higher high with the SPX since about the 30th of last month and diverged yesterday and continues to hold that position.

Sector rotation since yesterday, remember last Friday I said "Financials, while showing some underlying weakness, seem to be the sector that is holding the market together". Today Financials are moving out of rotation, Energy is about the same as it was yesterday, Basic Materials (where a lot of momentum stocks are) is stronger today but starting to fade off, Industrials are weaker, Tech is a bit stronger, Discretionary is fading off. As for the "Flight to safety" sectors, Healthcare and Staples are both rotating in today, Utilities not yet.