Be Very Careful Buying This Rally

| About: SPDR S&P (SPY)

Stocks may have enjoyed a two-day rally (which faded by the end of day two), but other "risk" markets are struggling to follow suit. Over the past few years, when the U.S. stock market has enjoyed a lasting rally, popular commodities such as crude oil (NYSEARCA:USO), soybeans, corn, gold (NYSEARCA:GLD), silver (NYSEARCA:SLV), and copper tend to join the party. Furthermore, in recent years, strong stock market rallies are often accompanied by strength in the so-called developed country commodity currencies such as those of Canada and Australia. Thus far, as a collective whole, these risk assets are not showing the strength I would expect if the recent rally in the major equity indices is to be a lasting one.

Not only are commodity-related risk assets not confirming the rally in stocks, but high-yield corporate bonds aren't either. While it is true that the iShares iBoxx $ High Yield Corporate Bond ETF's (NYSEARCA:HYG) share price was up big yesterday, the net asset value of the fund actually declined 0.39%. Moreover, high-yield spreads, as indicated by the Bank of America Merrill Lynch U.S. High Yield Master II Option-Adjusted Spread, actually widened yesterday for the seventh day in a row and are now at the widest point since Jan. 30, 2012. Even when looking at the high-yield market on an issue-specific basis, things didn't look good during yesterday's stock market rally. Among junk bonds, decliners actually outpaced advancers by 1.82 to 1, despite popular high-yield ETFs rising in price and despite the stock market rally.

It should also be noted that in recent days there has been some fairly sizable put option trades entered on the SPDR S&P 500 (NYSEARCA:SPY), one of which I outlined in my recent article "Massive Option Trade On SPY An Eye Opener."

If you are tempted to enter the stock market at these levels, exercise caution. I have my shopping list ready and am looking to put money to work in stocks, but I want to see a bit of strength on the long side from the commodity, currency, and options complexes before I enter with conviction. Until then, I'll stick to nibbling here and there when opportunities present themselves.

Disclosure: I am long HYG. I am long gold and I am long silver.