Market Update: The Warning Signs Keep Accumulating

by: DNA Decoder

The S&P 500 (NYSEARCA:SPY) may have been very bullish, but beneath its surface, the signs for trouble have been growing bigger. Although I am bullish on the long term, I started to reduce exposure to equities in February as a precaution on the short term (see 3 Powerful Trends That Have Been Giving Us A Warning). Weakness in fundamental and inter-market trends are more common with each passing week. With the initial jobless claims creeping up, how long will the market go up without relieving some pressure?

Key recent positives for the market:

  1. Construction spending went up from -2.1% to 1.2% as reported on Monday April 1.
  2. Factory orders went up from -1.0% to 3.0% as reported on Tuesday April 2.
  3. Even though Italy's bond yield is still in a slight uptrend, major panic has been averted so far. Both Spain's and Italy's borrowing costs are "under control" for now.

Key recent negatives for the market:

  1. Initial jobless claims went up from 357k to 385k as reported on Thursday April 4. Claims have been increasing for the past three weeks and the numbers reflect acceleration.
  2. Industrial metals (NYSEARCA:JJM) and commodities in general (NYSEARCA:DJP-OLD) are sliding down like the world is ending.
  3. With the three-month LIBOR-TBill spread increasing and the interest rate spread decreasing, it is evident that credit risks have been slowly going up recently. Financials (NYSEARCA:XLF) are starting to show a little weakness.

When the mentioned negative point No. 1 meets negative point No. 3, it means trouble for the leading economic index. Also, it doesn't help the bulls that the homebuilders index (NYSEARCA:XHB) is going down, dividend stocks are beating the higher beta stocks and the stock market sectors are playing the risk-off dance. Take the SPY:XLU ratio as an example below. The defensive utilities sector (NYSEARCA:XLU) has been performing much better than the S&P 500 proxy.

Something to watch in the coming weeks

With the U.S. dollar (NYSEARCA:UUP) trending up while the euro (NYSEARCA:FXE) trends down, and with so many inter-market trends leaning to the bearish side, how can the market continue to be so resilient?

The answer seems to lie in the local bond market relationships, which have resolved the risk-off mood of other inter-market trends by moving laterally and holding its ground. The "riskier bonds" to "safer bonds" relationship or (NYSEARCA:JNK) to (NYSEARCA:IEF) ratio is an example of that.

The yield curve and TED trends should be the forces that can make the bond market risk-on relationships crack. For now, I remain cautious and only time will tell if a sell-off is brewing or if Ben's open market operations will keep inflating the stock market without resting stops on the short term. Watching (NYSEARCA:TLT) perform almost three times better than the market today (on a positive day) may be the beginning of something not good for the bulls. Trade safe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Any content in this article should not be considered as a recommendation or investment advice given that financial objectives and individual needs of the end user have not been evaluated. Suggestions or tips are for information purposes only and there is no guarantee on stock returns or market performance. All readers must use their prudence and consult their financial advisors before acting on any of the securities or suggestions mentioned or engaging into any other high risk investment. I do not hold any responsibility and cannot be held liable for any losses incurred (if any) by acting on the information provided.