Market Anthropology: Valentine’s Day – the Hangover

Monday, January 16, 2012

Valentine’s Day – the Hangover

The thing about divergences….

…is, there should be enough information in the divergence itself to make an educated decision as to which one will maintain trend and which one will break. The divergence is the first clue that something’s not quite right. Like a romance that grows distant over time, one of the respective parties likely knows enough about the other to determine if the relationship can be restored – or if it is in fact broken. Markets, just like women – need your complete attention. It’s imperative to know as much about the respective relationship, so that you will have the emotional aptitude to determine its course. It inevitably becomes complicated, less we be reminded of the overused – although timeless, relationship and market wisdom from the Dr. Phil of his time – Mr. John Maynard Keynes, 
“Markets (and people) can remain irrational far longer than you or I can remain solvent (or sane).” 

When thinking about the equity markets here and their divergence from the rest of the pack (currency, commodity and credit markets), I have a hard time seeing the impetus for what will be required to have the “Three C’s” come eye to eye with the equity markets perspective. Over short timeframes, stocks tend to be the most insensitive asset class to their surroundings. Going on a bender while the other parties prepare for a wake is certainly within their psychological profile. I am speaking through my own biases of course, but if I was a bull, I would feel more comfortable if the market had traded in concert with a declining euro or a strengthening Treasury market and was loaded with heartbroken sentiment for the next pivot. Markets can jump with great elasticity if the bus is crowded to one side. My point being, even if the euro decides to bounce like any dead cat can – the amount of reflex in equities will likely be muted because the sentiment picture has become so exuberant. 

Below is a fractal study of 10 year Treasury yields that compares its past year trajectory with the SPX from the 2008/2009 timeframe. As apparent in the chart, both markets have corrected with very similar structures, proportions and momentum signatures. 
If the fractal proves prescient for TNX, and considering that in the past Treasury yields have typically bottomed before the equity markets – the relationship between Treasuries and equities will be restored by Valentine’s Day – with what could only be considered a very painful hangover for stocks.

As always, stay frosty – just emotionally available…