Risk ‘ON’

I have a short position against the S&P 500 and despite Friday’s EoD reversal and yesterday’s down day, as noted to subscribers in an update, I don’t feel very good about its prospects.  I am net long the market, and that is for a reason; recent signals have been more bullish than bearish.

Greece?  Ha ha ha… was Greece 1 bearish?  How about Cyprus?  How about the litany of other meltdowns around the world since?  In the price obsessed casino (where patrons checked any concept of value at the door), it seems to be all bullish because even when backing out the 24/7, 365 inflationary global policy hoses we realize that over bullish sentiment keeps getting reset by these anxious events and the bull eats that for breakfast.

The title proclaims risk ‘ON’ by this one indicator, the 10 yr – 2 yr yield spread.  There are other indicators in agreement and others not in agreement.  But insofar as we are talking yield spread, it’s risk ‘ON’ baby.

10.2.spx.au

Uncharacteristically, gold has spent the last few months climbing against a declining yield spread.  They are positively correlated over longer periods.  Just as interestingly, the US stock market has been in what we have been calling the ‘swing baby, swing!’ phase (i.e. going sideways in a jagged and volatile manner) even though the yield spread backdrop (implying financial calm when declining) has been supportive.  They are inversely correlated over longer periods.

So the two possibilities that pop out are that a) SPX and Gold have had premonitions of a coming change (for the worse) to yield curve dynamics or b) that the curve is right, SPX is going to break upward from consolidation and Gold is going to get hammered (ref. latest CoT data).  These are the kind of markets that beg you to gain a valid indication of coming moves before committing too enthusiastically.

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