There is an expression if it ain’t broke then don’t fix it. Well it certainly appears that the trends in place since the end of 2008 across the various asset classes remain in place today with little to challenge their “legitimacy”. But what if we simply have not looked hard enough? What if we are walking right into a trap! We don’t take our cues from what other people think is going to happen(if the last 18 months is anything to go by individuals have absolutely no idea of what the next 12 month will bring), rather we listen to what the market is telling us that it wants to do.
From an equity market perspective if the market was in trouble then we should at least see non-confirmation from the broader market like small caps or even emerging markets. Yet both the Russell 2000 (IWM), developed market small caps ex US (GWX) and emerging market small caps (EWX) are only a few “pips” from multi-week highs. Market internals in the US remain strong with the NYSE Advance Decline Line showing absolutely no sign of weakness. If the market is getting ready to make a material move to the downside it is doing a very good job of covering its intentions.
We did see some strength last week in US Treasuries and weakness in Junk bonds, but this nothing outside market noise. Both TLT and JNK sit well above their respective resistance and support levels. We have found junk grade bonds to be perhaps the best canaries (of the coal mine variety), or early warning devices, for the prospects for risk taking. We would be really worried if JNK was falling in a crumpled heap but it seems that any weakness is met with strong buying support. Of course this won’t last forever………..but the point at which it breaks down may well be some way off.
The Old CRB continues to display all the characteristics of a healthy bull trend with a series of higher highs and higher lows and now it appears that the precious metals group is taking the lead again. Although the agricultural sector has been showing some weakness as of late (that being said wheat, corn, oats, and soya are far from making a multi-week low) we can find no credible evidence of commodities “topping” out even in non USD terms!
The rise in the USD Index was reasonably substantial but that behaviour is not typical of a long term, even an intermediate term, bottom formation pattern. It is more akin to a short covering rally. The inability, so far, of high yield currencies to break higher against low yield is a concern, but that being said emerging market currencies have yet to show any weakness. So we will give the carry trade bulls the benefit of the doubt.
