I could really just keep changing the date and using the same Market Recap lately because the message has not changed. Credit VS Equity. One thing you’ll find here is consistency. May not like what I always write but I won’t waiver from what I see.
Equity is trying desperately to breakout here. There is no question about it. Yet notice the sellers that come in late in the session or shall I say lack of buyers as Martin Armstrong would describe price action. On the other hand credit is “strong like bull.”
Ask yourself one simple question if you would. The possibility of an outright Greek default is rising and based on yields is pretty much guaranteed. There is therefore a chance, a highly probable one regardless of what ISDA tries to do that a credit event will be declared. Which means those who wrote CDS on Greek debt will be forced to cover such insurance. So the question I would be asking is simple. Are those big banks on the hook for billions in CDS payouts buying stocks here and getting less liquid or selling and getting more liquid? I’ll let you answer that one on your own.
As for the ongoing war between credit and equity, let’s take a look “under the hood.”
Treasury looks solid right here. It took out all time highs across the curve and now is simply waiting for a little further equity weakness to march on higher. I can’t help but wonder if the “churn” we are seeing between both asset classes is simply capital flowing out of equity into treasury no different than GS raising AAPL to a buy so they can unload their stock before the selloff.
Treasury just looks very strong and as I have stated multiple times it is strong across the curve unlike equity lacking such cohesion and leadership. Below is the 10 year treasury future highlighting this week’s very bullish price action.
Ten Year Yield (TNX) VS SPX
The bear flag that failed earlier in the week on TNX continues to hold after multiple backtests. The reason I put so much emphasis here on treasury is the correlation with the July bear flag that failed which saw equity selloff hard. This selloff in equity preceded the US downgrade and famous “head and shoulder’s” neckline fail.
In other words a very strong case can be made that it was treasury that brought down equity. What is most encouraging about this current credit equity divergence is not only the sheer size but the five month consolidation in treasury futures and in TNX as highlighted on the chart below. Powerful moves come from such long consolidations.
Vix VS SPX
The vix and SPX ying and yang. When one goes up the other goes down. But when markets are turning the two don’t always turn in tandem. We currently have a descending wedge pattern on the vix that has taken nearly six months to resolve. This pattern tends to resolve with higher prices (vix) and if you study the relationship of the SPX and vix right now you will see that is in fact happening.
Notice how the vix although still trending lower over the past month is doing so at a much more gradual pace than the SPX is rising. In other words even with the SPX “helping” the vix to put in lower prices it is fighting the temptation. This fits the nature of the descending wedge pattern where downside momentum is shifting.
Below is a comparison chart of the CRB, Oil and Copper. All three look very weak and that is in the face of recent USD weakness which based on the inverse correlation should actually be bidding up these commodities but it is not. Oil peaked on January 4, 2012 and has put in lower prices ever since including breaking lower from an ascending wedge pattern and now testing the 200MA.
Copper has failed on multiple tests now to close above the 200MA. CRB has not even taken out the October highs setting up a very large divergence with equity markets.
As Tom Petty says “the waiting is the hardest part.” Tomorrow we get the NFP report which includes the annual birth/death adjustment. Based on this adjustment the report should be pretty weak. ADP which is not the best forward looking predictor of NFP was also below expectations but like I say it is not the best indicator.
Equity may very well try and rally in the face of a weak report just like it did in the face of a weaker ISM, construction spending revisions, etc. Credit on the other hand acts more rational and a weak report will likely fuel more capital into treasury futures.
As I have said multiple times I believe credit is capping equity here and any further strength in treasury futures will likely set up the big equity fall I have been (not so) patiently “waiting for.”
Images: Flickr (licence attribution)
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