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It's Groundhog Day for Equities and Bonds

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If the backdrop looks familiar, it should.

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As I write this on Sunday evening (September 29) with the S&P 500 (INDEXSP:.INX) futures down 13 points, we might be on the verge of yet another bout of market anxiety, with governments both here in the US and in Italy managing to screw things up for everyone concerned. But fear not: the Redskins won their first game of the season (sorry, Todd Harrison) and the tells I offered to judge whether this is just another down phase in the markets' bipolar behavior (see Corporate Bonds, Derivatives, and How They Wag the Equity Markets) suggest that it is in fact just that.

First off, we are about to flip the calendar after a historic month for the corporate bond market, with more than $210,000,000,000 (that's billions in case you are losing track of the zeros) of cash collected by companies from willing buyers. If that's not an all-time record, it's got to be pretty darn close. And the $210 billion tally does not even tell the whole story, as high yield rates (measured via the Barclays US Corp. High Yield Index) actually dropped by 15 bps during the month. Ditto for the credit default swaps of large US financials (20bps tighter for September), the 2-year swaps (with an 8-day moving average of 14.43bps vs. 17.71 at the beginning of the month), and broad index HY CDS (396bps vs. 406bps). So if you lived in a world without equity markets, things right now would be pretty sunny with only blue skies ahead.

But of course equity markets do exist, and in fact they are very important to many of us; and there the mood is far from cheery. The parade of earnings confessionals has already started with one of my long-time favorite companies -- Cypress Semiconductor (NASDAQ:CY) -- lobbing an ugly warning into the semiconductors crowd. Fortunately I was not involved in it until Friday, when I bought the stock at $9.02 and paired it with the Dec 9 puts for $0.60. If I can't trade the two for $0.62 of profits over the next three months, I've got bigger problems than the markets. Meanwhile, Europe seems to be embarking on another freak-out session courtesy of my old country, and not to be outdone, our Congress is on a mission to sink even lower in our collective judgment. After a tour of several southern states over the past week I can assure you that's no small task, but of course you already know that.

Oddly enough however, if we remove the noise and biases from consideration -- and charts are ideal for that -- traditional levels are nowhere near giving out major warnings, with the SPX futures 50 DMA at 1671.31, the 100 DMA at 1648.15, all the MAs except the 8-day still upward sloping, and the upward trendline that has defined the bull move since last November not coming into play until about 1646. A similar message comes from the DeMark counts, where the S&P futures would need a weekly close below 1646.80 just to cancel the current weekly TD Sell Setup (only on bar 4 so far), and on a daily basis TDST Level Down (think of it as support) sits at 1624.60.

If this backdrop looks familiar, it should. Four-plus years after the end of the crisis, equity types continue expecting a repeat of the end of the financial world as we know it, while corporate bond buyers have fresh investment cash burning holes through their pockets. Stuck in the middle with them, companies keep borrowing from the latter to buy from the former. I wish it were more sophisticated than that, but the facts and the stats are what they are, and if interested, you can read more about it right here.

So trade them both ways until the cows come home if you are so inclined, but longer term, if the sellers are going to press their luck, they will have to contend with the cash-bloated balance sheets of many companies and a corporate bond market that keeps on giving.

Twitter: @FZucchi


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Positions in CY SPX futures.
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