The Market: You Don't Buy The Last Bounce, Especially When Mars Attacks

Includes: SPY, TLT
by: Greg Merrill

I don't usually comment on the price of the equity markets but considering what I'm seeing I thought I'd bend one of my self-imposed guidelines. Remember you are hearing this from someone who does not see any positive forces influencing the market right now.

The markets have been pretty much stuck in a rut since early August and seem to be driven by the constant stream of contradictory rumors coming out of Europe. Will they save Greece? (No, they can't) Will the European banks be nationalized? (No idea, but I'm not hanging out to find out) Meanwhile China's negative real rate maneuver and excessive credit creation is coming back to haunt them. And America is slowing down.

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Stuck in a rut for the last two months.

Here are some of the indicators I look at to assess financial market risk and as you can see all of them are going the wrong way.

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Ted Spread

Notice how the TED (Treasury - Eurodollar spread, an indicator of banking stress) peaked and started healing before the market bottomed in early July 2010; showing a positive divergence.

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Emerging market bond spreads, dollar denominated

The spread for emerging market bonds also shot up before the correction in 2010 and also showed a similar positive divergence. Right now spreads continue to widen.

My own proprietary indicators are not showing any sort of improvement either, again the opposite of 2010.

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Note how in 2010 risk stopped going up.

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Compare to 2011 where the RiskMeter keeps going up.

Do I think the market is going to crash? I can't answer that question. If the European situation looks like it can be truly resolved we could get a serious rally. I'm waiting to see what my fundamental indicators of market health tell me before I get back into the stock market.

Right now they are saying wait.

Remember, no matter what happens there's someone out there who'll be trying to convince you to buy stocks right now.

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Video scene from Mars Attacks

Additional Reading:

  • He's been calling for a slowdown for a while and he just upgraded to calling for a recession this week.
  • Humble Student of the Market - Germany engaging in expensive can kicking. We may get a bounce but it does not fix the fact Greece has too much debt. Who owns it is immaterial.

Disclosure: I am long TLT.