Dan, CC, and I have had frequent discussions over the past week about our trading strategy over the next month. We all recognize it as a particularly important period for traders given the headline-laden environment and the many potential catalysts. One mental test I like to employ for emotionally-charged events like this weekend’s Greek elections is the following: what would I do as a trader if there was no event?
In other words, how would I want to be positioned assuming it was a quiet, generic weekend? And that test near the end of last week forced me to keep my risk-off positions, even though my emotions were a bit frayed as the market rallied. My main macro indicators tell me the following:
- Defensive sectors continue to outperform cyclical sectors in the U.S.
- Overall market breadth continues to weaken as fewer stocks participate on the rallies
- Bond markets show continued signs of potential panic as TLT held its breakout level last week and sovereign yields in Spain and Italy remained elevated
- Emerging market currencies are still close to 3 year lows vs. the dollar
- Cyclical commodities like copper and oil continue to have trouble rallying on good news
- The credit markets (as measured by IG CDS) remain slightly wider than they were the last time SPX was at 1340, so credit underperforming stocks in the past month
- The main positive is the price action in major stock indices; the SPX has remained solidly above its 20 day ma and tested the declining 50 day on Friday
As you can see, the bulk of my market “tells” are still flashing warning signals. Sometimes it’s best to ignore the headlines and listen to the market. The market seems to care much less about Greek elections, and much more about Spanish and Italian solvency as well as slowing emerging market economic growth.