China, Spain Help Risk Near Key Support

 |  Includes: EEM, IEF, SPY
by: Chris Ciovacco

The hope for more money printing allowed a key market ratio to hold at a bullish support zone Thursday. Using a familiar script, global markets shot higher primarily based on (A) news related to government debt, and (B) speculation that more stimulus is on the way. From The Sydney Morning Herald:

Stocks advanced and the euro recovered from two-week lows on Thursday after the Spanish government said it would cut spending sharply and speculation grew that China will act to support economic growth. Spain's Deputy Prime Minister Soraya Saenz de Santamaria announced a timetable for economic reforms and a tough 2013 budget focused on spending cuts rather than tax increases as the country continues to negotiate a possible European aid package to ease high borrowing costs.

If you follow our work, you know we have been concerned about weakness on numerous intermarket charts. One of the risk-on vs. risk-off ratios we track is the performance of the S&P 500 (NYSEARCA:SPY) relative to intermediate-term Treasury bonds (NYSEARCA:IEF). When the ratio is rising, stocks are performing well relative to bonds (see chart below). This week, the ratio is trying to make a stand (see point A). The intersection of numerous trendlines could act as support for stocks relative to bonds. The last four times the ratio held at support, it marked a good entry point for stocks (see 1-4 below). The S&P 500 is shown as a point of reference.

Click to enlarge

The pattern has been to buy risk at support (where the ratio hits the blue trendlines). At some point the pattern will be broken, but for now it remains intact. We did redeploy some of our cash today into emerging markets (NYSEARCA:EEM) based partly on the chart above. The chart above is a weekly chart, which means where it finishes the week is much more important than Thursday's close. Friday is a big day for risk.

Disclosure: I am long EEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.