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The Market's Change of Character


Is stealth risk avoidance starting to take place?

As readers know, I am not exactly the biggest economic bull on the planet at present. And sometimes the economy and the markets are at odds. So I must look for certain data points to know when a 'change of character' is beginning to take hold in the markets. I think I am beginning to see (and any Professor that wishes to chime in on the subject, please do) a 'risk aversion' trade taking place in the market. There is an obvious 'sell small cap, buy large cap' trade going on. In addition, the NDX is now negative on the year despite the Dow's run for all time highs. And the Value line and Wilshire 5000 are lagging badly. Check out the NDX versus the SPX below. Pretty obvious action.

I'll also note the slight rolling over in the BKX, which to me is the second to final straw in this play. Note here how it is rolling over....

The most important to me, the bond geek of the Ville? Corporate spreads, and in particular spreads on financials, like money center banks. I have asked all of my coverage out there to keep me up to date daily and there seems to be a slight (couple of basis points) widening taking place. Very stealthy so far. But if the market begins to really avoid risk as the CRB breaks and Treasuries are bid up, I will seriously run for cover. This is the most important part of the bearish puzzle that is missing and one that I am watching like a hawk. In my experience, the potential pain in spread widening can be humbling and nasty. After all, folks buy bonds for safety right? What could be worse than losing money in a safe investment? Losses should be reserved for stocks? WRONG! I could tell some 'war stories' about corporate bond collapses as spreads blow out, but not after people just ate breakfast. Take it from me, they are not fun....Some day I will tell you about them, but to be sure, my firm is void of corporates and intend to stay that way until the risk/reward ration comes into balance.
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Position in Treasuries

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