Today was another battle in the war between US Treasuries (UST) and equity. Both continue to try and breakout and move higher, something that is simply not sustainable. Let me rephrase that it is sustainable to an extent.
That was the case over the past five months. After a breakout to all time highs in July UST have simply consolidated above those highs while equity has been able to inch higher. Equity now sits up against pretty stiff resistance but to be fair has taken out prior resistance levels with relative ease.
In Wednesday’s Market Recap I discussed how the FOMC
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I believe Tony did a superb job in building a case for shorting equities. I entered my short trade today (short S&P and long VIX) with several data points in mind. First of all, I agree with Tony’s assessment regarding UST and equities. The momentum indicators for each show that equities has topped while UST has been consolidating and ready to break out. In addition, it is more than coincidental that RSI peaked right at 1330 resistance. In addition to Tony’s analysis, the other confirmation I like to use is the Baltic Index (BDI is a measure of the daily cost of shipping raw materials by ship around the world). There is high correlation with the S&P. Not sure if Tony has used this prior but essentially this index precedes moves in the stock market, both up and down, because global demand for raw materials is an early warning indicator of future economic production. For the last six weeks, in particular, The Baltic Dry Index has been on a bearish tear and diverging from the S&P. Just last August when the market fell hard, the BDI began diverging began diverging about six weeks ahead.
The other data point is I have a model that I have been using for over 5 years that has a .90 correlation in identifying market bottoms and tops. It pointed to a top yesterday which lags one to three days.
Lastly, the risk/reward is very good right now. As I assess it, the upside potential is perhaps 40 or 50(more likely 20 or 30) points up compared to a fall of 200+ points as it did last August. I like those odds. I will place my stop at 1360.
Good luck trading everyone…
ejv — very interesting analysis – I’m going to start watching the BDI going forward.
what’s very interesting, and little talked about today is how similar today’s CAT conference call sounds like the conference call from Q2 2008
the first few paragraphs of the CEO’s opening statements are almost a cut and paste job
Q2 2008 http://seekingalpha.com/article/86304-caterpillar-inc-q2-2008-earnings-call-transcript
Q4 2011 http://seekingalpha.com/article/322487-caterpillar-inc-ceo-discusses-q4-2011-results-earnings-call-transcript
Regarding CAT, read this article. Summarizes all you need to know.
http://www.financialarmageddon.com/2012/01/wrong-again.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+financialarmageddon+%28Financial+Armageddon%29
Wow.. those Caterpillar folks must have bugs in their brains..
“although Caterpillar noted concern that central banks could slow economic growth if they raise interest rates prematurely.”
Like that can ever happen again in the US or EU.