There is very little fear in the markets at this point of time. Clear price action, option market activity and VIX all indicate to a relaxed market.
Under normal and rational conditions, one would have taken theis at face value but not at a time like this. We are going to look at some other inter market relations to understand the developing trends.
The aussie continues to show the way. Even though SP500 still is not ready to give way, given that SPY has never rallied without the aussie assisting it, we will look to the AUD/USD pair to show guidance.
The AUD/USD is now running close to the 200dma which was broken last week and has not bee regained since. The 200 dma comes in at 1.0377 vs 1.0396 last week. The Oscillators are negative with a trend down while daily stochastic are weak below 20. Even with RISK ON trade in SPY, we are yet to see any kind meaningful rally in AUD/USD.
Any break of the trend will accelerate Bond market flows and therefore increase selloff in Gold assets. The positive flows into Treasury will put pressure on SPY as equity sell off begins in earnest.
Charts from Treasury market continue to lead us to believe that extreme compression in yield will ultimately have its disastrous effects on equity investor.
Further yield on 10Y UST, has now broken below 1.97% which is now an all time low. The 20 year bull run in treasury continues its relentless rise.
QE1 and QE2 had unnaturally pulled down the yield by over 15% as banks stocked up in expectation of QE. We see a massive compression in yield since August 2011, the first time, there was market rumors about Bernanke moves to further easing. The yield compression in August/September 2011 has been larger than the first and second QE operations giving rise to the notion, that QE3 may be larger than expected.
Therefore thinking contrary to what I see on the SPY and VIX charts, currency markets and credit market point us to extreme weakness, reflection of which should begin on equity markets over the coming weeks/months. Dollar charts as pointed by us here are well on its way to 80 levels. Gold:TLT ratio here points to a sustained rally in bond markets and therefore further supporting the risk aversion trade. Will the trigger be Bernanke QE3 which may be massive disappointment.