Wednesday, February 8, 2012

Risk Appetite and Spreads

I think I am off a day because I did not go to work on Monday. Feels like Thursday for some reason. I don't know.

Risk Appetite and Spreads
Forget it! This is a clean blog, unlike SOME other ones I have seen on the Internets....

In a few previous posts I have compared the S&P 500 with some "safe" sectors, usually tobacco (I use the stock RAI as proxy) and the utilities sector (XLU), to get a feel for how much risk appetite market participants are showing at any given time. I look at these charts every day, but now is a good time to do a blog post as there are some interesting things going on. The thing about comparing sectors too keep in mind is that spreads can contract or widen by:
-One component dropping hard
-One component blowing up higher
-One component shows increased growth while the other either slows or stalls
What I am saying is if the SPX is rising it does not mean tobacco or utilities will collapse, but maybe they will under perform, and vice versa.

Note: I actually prefer the uncluttered Yahoo basic comparison charts for this type of work, but you can always make your own.

Here is RAI vs. SPX for a 6 month time frame:
The spread between RAI and the SPX is the most narrow since the October-early November 2010 market top. I would say that the October compression of the spread was a fast event while the compression since early December has been a more gradual closure. Also tobacco is not falling off a cliff, it has slowed but the sector has good growth and still is attracting money. This is a better environment than a risk on/risk off panic.

Here is a 6 month comparison for the XLU and the SPX:
For the first time in 6 months the SPX has now crossed above the XLU since mid January. It's clear in late December money rotated out of utilities and a bunch flowed into stocks. The run has not weakened as yet. Again, utilities have come in, but they are not spiking down in a risk on kind of frenzy. I view this as a positive for the market.

Backing out for a two year view of the XLU vs the SPX:
I think this chart is important for three reasons:
-The late August 2010 run in the SPX finally crossed over the XLU around mid October, paused, then resumed it's run for another 3 months. The Armo Trader has some comparison charts worth a look on this time period compared to now as well.

-Notice the utilities, while lagging, were not getting killed over that time. They performed, but underperformed the SPX.

-By a highly sophisticated technical method I use, it's called counting, I count 6 months where the SPX was entangled or lower than the XLU in May - October 2010. Applying the same count starting at August 2011 I arrive at the here and now of late January - February 2012. And the SPX just crossed over.

6 months of indecison. 6 months of fear. 6 months of macro headline panic mornings. Maybe these things need 6 months to work themselves out. I will FULLY grant that the late summer of 2010 had the promise of QE 2 and it was delivered right in the fall, that is a real tangible that markets do not have right now. Still, the action and the charts carry weight in their relationships.

Have a good night.


GawainsGhost said...

There's an old joke. If the first astronaut who set foot on the moon, I think it was John Glenn but whoever it was who said, "That's one small step for man, and one giant leap for mankind," if he had just stomped his foot and said, "Coca-Cola!" he'd be a billionaire today. You can't buy that kind of advertising.

I remember that day. I was in the third grade. The teacher wheeled in a black and white TV and said, "You have to watch this." I saw the moon landing live. Then when I was walking home, I looked up at the sky and there was the moon. And I thought, "There's a man walking around up there." It was an incredible experience.

I actually have the moon landing stamp. It's part of my collection, on a commerative envelope dated first day of issue and day of landing. That's extremely rare and very valuable. I also have all the stamps of the American Revolution, the Bicentenial, the space program, all on commerative envelopes dated first day of issue.

I also have an autographed picture of Elvis from 1956. Now that's worth something.

But you never know what something is worth until you sell it. And I refuse to sell, so I guess it's all worth nothing.

I think you spend too much time studying charts and diagrams, GYC. You should be looking at profit margins and dividend payments. There are several companies out there that are sound investments.

Day trading is for losers. Just ask my former accountant. He went dead broke day trading stocks. The bank foreclosed on everything he owned, including his mineral rights.

A lesson for us all.

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