Tuesday Technical Review: Credit Markets Diverge.

Another day where equity and credit continue to diverge from one another. From treasury yields falling to sovereign debt yields rising to multi year records in EUR basis swaps, sovereign CDS, etc credit is pricing in continued risk to the global economy while equity goes the other direction.

At the same time there were divergences within equity today which was also a sign that favored weakness into the close as witnessed by the late day selloff in ES (SPX futures). Specifically the TF (Russell 2000 futures) was weaker than ES by 70 bp (0.70%) while EMD (Mid Cap 400) was weaker by 30-40 bp.

The breadth (net advancing versus declining issues) was also negative into the close even though equities managed to close green. The only real bullish action I can see today was in AUD and oil (up 1.7%).

Treasuries

Both the 10 and 30 year continue to look bullish in price, bearish in yield and the past two days have given up all or almost all of their opening high (in yield) into the close. If they were to show a sign of turning that would be bullish for equities but they are not and that is therefore bearish for equities.

Currencies

The AUD was very strong today and needs to be watched for a reversal or if in fact this is a new leg higher. My suspicion based on USD demand as demonstrated by various credit products is that this is an oversold bounce but if it continues that would be bullish for equities. Specifically the AUD seems to be a better correlation with ES (SPX Futures) than does the EUR.

As discussed in a prior post 1.31 is a major test for the EUR as it represents a six year support line and would be extremely bearish if it fails. A break would also result in a move higher in the USD which would be bearish for equities.

Indices

Below are daily charts of Russell 2000 (RUT), Mid Cap 400 (MID), SPX and the Nasdaq (COMPQ). I point these out because they show a breakdown among them which point towards overall weakness, not strength in the SPX.

RUT – failed bull flag and failed backtest.

MID - Closed well off the highs, stopped at the 10EMA. Not an overly bullish chart but also not overly bearish.

SPX - Closed on the lows. Does not look like anything but a pause in a downtrend with 1090 first target then 1050.

COMPQ - This is one sloppy chart. I see little in terms of confirmation today of yesterday’s move.

Few Other Notables

Financials, specifically BAC were very weak today. Partly based on news of downgrades of subordinated debt but also they are one of the few sectors truly pricing in the interbank lending and sovereign debt concerns. This will eventually bleed into all equities should it continue and there is no reason to think it will not. At least the news flow today is not indicative of anything that will produce a positive change in these markets.

Apple (AAPL) looks very weak still after testing two key up trend lines and piercing them on an intraday basis. The leader of tech has struggled for a while now and rather than a concern about future growth which is still solid I suspect it is more indicative of the most widely held stock being a source of liquidity.

Images: Flickr (licence attribution)

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