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.

Running a Little Hot

As I write this the Denver Broncos are holding a 20-13 lead over the Pittsburgh Steelers. No idea if they can hang on, but it would be a huge upset if they do!

I am moving in slow motion because I may have overdone the beers during last nights New Orleans Saints second half explosion and win over the Detroit Lions.

Running a Little Hot
I have been pretty suspect of the rally last week. Besides low volume, figured that was going to happen, the names running the hardest were some of the more beat down names with heavy short interest. Overall, short interest is at multi month lows, and the air pocket from the Tuesday gap up is a real weakness for the market should any drop happen. There's not much underneath holding things up. Add to all that the level of bullishness is very high.

I wrote a post last Sunday where I discussed keeping an eye on "safe" companies and sectors should money start coming out of them. I wrote:

It's natural and expected that in a move to a more aggressive stance on the market, money will be pulled from defensives and put to chase after other assets.....
If prices are dropping for BOTH the defensives and the general markets then you have to respect that as a strong signal. In no way has that slight blip been confirmed, but you need to be aware of it.

Up to date comparison charts are in order.

RAI vs S&P 500:

Weakness in the tobacco company RAI for sure, but if the S&P is topping this is not that great a thing.

Utility Index XLU vs S&P 500:

Again, seeing the same thing.

Another item to watch is when Biotech as an industry gets hot, it can mean it's late in a uptrend cycle. Now there has been a ton of news that has been supportive of the sector so one has to keep that in mind. Here is the Nasdaq Biotech index (^NBI) against the Nasdaq for the last 6 months:

Again, it's looking a little late in the run here by this measure by how much the biotech index is outpacing the overall Nasdaq.

It's my belief that some kind of correction is very close. I could be wrong, and if I am these charts above will change to show that a longer rally is at hand supported by money movement.

Have a good night.