Baseline Analytics Blog

Market risk assessment tools and tactical investment opportunities driven by curated financial insight

Written by Marc Chandler.     Investors have become unhinged. The increased volatility and dramatic market moves challenge even the most robust investment strategies. This sets off a chain reaction of money and risk management that further amplifies the price action, like an echo chamber. Then a cottage industry of reporters, analysts and bloggers offer explanations often without distinguishing the initial sound from the echo.
 
At the same time, that which we have come to think of as terra firma has turned into quicksand. Interest rates are bounded by zero.Of course, there had been a few exceptions, like when Germany and Switzerland in the 1970s discouraged speculative foreign inflows, but it was not a generalized phenomenon.  Now it is widespread.  German and Japanese yields are negative out eight to nine years while Switzerland has negative rates through 15 years. All told more than $8 trillion of debt has a negative yield.

A ratio of high yield debt to investment grade corporate debt, using the ETFs HYG vs. LQD, peaked in October 2014 as the S&P 500 continued to move toward new highs.  

As seen in the chart below, at the highs of the S&P 500 this past summer, the debt ratio reached a lower high, then proceeded to decline to new lows.  During this timeframe, the S&P 500 attempted a new high in late 2015, only to struggle to its recent lows.  The debt ratio's "leading indicator" of stock market activity turned out to be rather prescient.

What's noteworthy in this relationship is that the debt ratio has reached the 50% retracement level from its uptrend that started in March, 2009. Should these levels hold in the debt ratio, a firming of equities can also be expected. A resumption in the uptrend for the ratio (as well as the S&P 500) would help to support the scenario that today we are seeing a correction in a bull market, rather than an emerging bear market structure.

 

junk

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Written by David Fabian of FMD Capital Management.    The unprecedented volatility to start the year has brought out nearly every type of expert opinion on the best way to ride out the storm. I have heard arguments ranging from “stay the course” to “this is just the start of the crash”.

Let me be clear by saying that absolutely no one knows what is going to happen over the next three to six months. We could be another 20% lower, 20% higher, or virtually anywhere in between. Anything can happen and to have 100% conviction in just one outcome is the sign of someone who is completely unhinged from reality.

Weekly chart shows (at today's bottom) a 38.2% Fibonacci retracement from the 2012 lows.

 

spxfib

Charts can speak a thousand words, so I will let the lines and arrows tell the story below.

Looking for extremes (vs. moving averages or peaks and troughs), compare the points of the blue arrows to the sames points on the green S&P 500 line.

The relationship here is the iShares iBoxx Investment Grade Bond Fund vs. its moving average as well as compared to a ratio of the ETF to the S&P 500.

Interesting comparisons that point toward additional evidence of the oversold equity markets. 

Here is the updated chart as of 12:10 pm 1/15/16: 

GAP2

Written by Marc Chandler.   The US stock market and the oil market appear joined at the hip. TheGreat Graphichere, created on Bloomberg, shows the correlation of the two markets. It is near 0.77, which is the highest since September 2013.  
 
 
The correlation was conducted on the level of the S&P 500 and the level of the front-month light sweet crude oil futures contract. It tells us that the two markets have been moving in the same direction nearly eight of ten sessions over the past 60 sessions.  
As the chart shows (on the left is the correlation and on the right is the frequency distribution), the correlation is not stable, and presently it is at an extreme. Although it is a descriptive statistic, I read it as a warning that such a tight fit is not sustainable and will break down. Although the correlation holds, it is a salutary caution to short-term traders that while knowing the direction of oil has been a good tell of the direction of the S&P 500, one ought not bank on it for much longer.  
Investors are more interested in the correlation of returns rather than levels. Here the correlation (percent change) is about 0.33 over the last 60 sessions.  This is thelowerend of four-month range. The peak since 2013 was set this past November a little above 0.50.  
Over the past 30-days, the correlation of returns is near 0.25. Yesterday it was nearer 0.20, which is lowest since last June.  

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Written by Marc Chandler.   The US stock market and the oil market appear joined at the hip. The great graphic here, created on Bloomberg, shows the correlation of the two markets. It is near 0.77, which is the highest since September 2013.  
 
 sP and oil
The correlation was conducted on the level of the S&P 500 and the level of the front-month light sweet crude oil futures contract. It tells us that the two markets have been moving in the same direction nearly eight of ten sessions over the past 60 sessions.  
As the chart shows (on the left is the correlation and on the right is the frequency distribution), the correlation is not stable, and presently it is at an extreme. Although it is a descriptive statistic, I read it as a warning that such a tight fit is not sustainable and will break down. Although the correlation holds, it is a salutary caution to short-term traders that while knowing the direction of oil has been a good tell of the direction of the S&P 500, one ought not bank on it for much longer.  
Investors are more interested in the correlation of returns rather than levels. Here the correlation (percent change) is about 0.33 over the last 60 sessions.  This is thelowerend of four-month range. The peak since 2013 was set this past November a little above 0.50.  
Over the past 30-days, the correlation of returns is near 0.25. Yesterday it was nearer 0.20, which is lowest since last June.  

 

The Williams Analytics LLC Blog has just posted a new article on the state of the US macroeconomy and what could be in store for the S&P 500 E-mini and 10-Year US Treasury Note.

As a brief preview, the macroeconomy is growing, especially on the real personal income and real retail sales front. Still, while both of these measures have been outpacing inflation on a year-over-year basis, slow-downs and volatility in each may be on the horizon.

The big news is with the S&P: despite the strong drop as of late, our forecasting models are predicting even further declines, especially in February. Whether a reversal to this strong drop materializes is a matter where only time will tell.

The 10-Year is expected to follow a long-established "W"-shaped trend in the year ahead. Much of this shape may be due to an anticipated manic-like reaction in the 10-Year with respect to new macroeconomic news.

Gain more detailed insights today by visiting the Williams Analytics Blog and by downloading Williams Analytics' many FREE Indicator Reports!

Charts can speak a thousand words, so I will let the lines and arrows tell the story below.

Looking for extremes (vs. moving averages or peaks and troughs), 

 

 

 

GAP

Charts can speak a thousand words, so I will let the lines and arrows tell the story below.

Looking for extremes (vs. moving averages or peaks and troughs), compare the points of the blue arrows to the sames points on the green S&P 500 line.

The relationship here is the iShares iBoxx Investment Grade Bond Fund vs. its moving average as well as compared to a ratio of the ETF to the S&P 500.

Interesting comparisons that point toward additional evidence of the oversold equity markets. 

 

GAP

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