Why We Aren’t Buying this Rally

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CDS spreads give warning sign

By Christine Hughes, Canada. Chief Investment Strategist, OtterWood Capital:

The market has recovered from the August and September lows bringing the S&P 500 back between 2,000 and 2,150 the trading range we’ve sat in most of the year. The price action in the CDS market does not confirm the bounce in equities though. The chart below is the S&P 500 and the investment grade CDS spread (inverted) going back to 2013. These two indices tend to move together since lower credit worries (lower CDS spreads) are a good signal for stocks, but as you can see in the chart these indices have diverged.


Typically in this type of situation, I look at the bond market for confirmation, and right now it is giving an early warning. The S&P 500 has rallied since August but CDS spreads have stayed flat signaling everything isn’t clear for a sustained rally. Additionally as I have noted here and here, the market rally has been narrow with fewer and fewer stocks leading the index higher which is also a sign the rally isn’t very strong.

Another recent trend has been the renewed strength in the US dollar after the Fed talked up a December interest rate hike. As you can see in the chart below, the US dollar has had a nice run the last month and is approaching new highs.


Positioning in the US dollar has declined since the beginning of the year (see the chart below). So although the move in the dollar has been sharp, the current positioning is not an impediment for it to continue higher.


By Christine Hughes, OtterWood Capital.

And the junk-bond market mini-rally comes to “an abrupt end” without an “obvious catalyst,” as Chesapeake’s Bonds & Shares collapse. Read… Capital Destruction Rages Beneath S&P 500 Tranquility

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  5 comments for “Why We Aren’t Buying this Rally

  1. CrazyCooter
    November 21, 2015 at 11:37 pm

    Monetary heroin can keep this zombie apocalypse going for who knows how long. We all know it ends, but timing it is just “rollin’ dice”.


    The Fed won’t hike in Dec and before Q2 is over next year new QE is going to be on deck. Everything is going to hell – and sadly to the moon before that. And this doesn’t include the military madness in MENA (Middle East / North Africa).

    Trying to invest or position in these markets is not unlike the poor short sod who got raped by Martin Shkreli:


    The casino is so rigged, analysis doesn’t matter, fundamentals don’t matter, and it isn’t a market. The insiders overtly lie, cheat, and steal and the “police” are just paid off and don’t care.

    I do appreciate the analysis, but perspective is important at this point in time. History has a lesson to teach about how these things end, but it won’t change our trajectory … and it won’t predict the moment when it all truly goes to hell. We just know that it will.

    Frankly I am looking at TreasuryDirect (to keep USD out of the banking system – I don’t think the FDIC has a big enough check book) and BitGold – after sufficient physical cash and gold in a safe deposit bot. I will go shopping after TSHTF, whenever that may be. I am trying to layer my liquidity, if that makes sense.

    Would love to hear what others are doing, in the same vein of thinking.



    • Petunia
      November 22, 2015 at 9:31 am

      It is a casino, and it is rigged, and analysis does matter, just not the financial kind. Look at what they do, not what they say. They have shown you that they will support the stock market no matter how insane it gets. Companies that don’t make a profit valued at 200X projected future earnings, take the hint.

      If you are a gambling man, place some small bets that you can afford to lose and don’t get too greedy. If you make ten or twenty percent in a short time get out and do it again later or elsewhere. It is not investing, it is betting with the house.

    • walter map
      November 22, 2015 at 10:31 am

      The world is getting trashed. You cannot save the world, so ultimately you cannot save yourself. The best you can do is delay the inevitable.

      Only the rich can save you now, and they’re not going to. They like things the way they are. They are motivated exclusively by wealth and power and have no interest in the survival of civilization or humans after they are gone.

    • Markar
      November 22, 2015 at 10:43 am

      Make sure that safety deposit box isn’t in a bank!

    • david
      November 23, 2015 at 12:15 pm

      FDIC only has a quarter of a penny of every dollar they insure. Not even enough to make a tiny dent if things shit the bed.

Comments are closed.