Between the massive volume readings and collective sell off in the commodity space seen yesterday, the stage was neatly set for the equity markets to continue yesterday's reversal and move lower. But in a seemingly disconnected trade, the S&P 500 managed to slough off early, albeit mild, weakness and finish the session 4.53 points higher to 1,228.28. This marked a new 52-week closing high for the index, which would normally be a significant milestone for any market. However, the disconnected nature of this move suggests that today's move is largely a product of continued fund flows out of the Treasury market and a bit of intraday gamesmanship from equity traders. (Yields were up big again today as the latest auction proved less well bid than previous ones. The bid-to-cover ratio wound up around 2.9 vs. a reading above 3 that's been seen routinely up to this point.) I say disconnected because the resiliency in the stock market was no where to be found in the commodity space. Gold, silver, and crude oil spent the day extending their prior session losses in a manner which I would have expected to have seen in equities as well. From my standpoint, this a puzzling development given the high correlation among these markets over the past several months. To be fair, commodities did not collectively break below significant support levels, so it's too early to say that the wheels are falling of the bus just yet. But, again, looking at the scale of the selling pressure that materialized yesterday amidst a positive news environment and the generally weak trade that was seen today, it is clear to me that risk is skewed to the downside. I know I've been saying this for several weeks now and I hate to sound like a broken record, but there are just a growing number of technical indications that point to a market that is prone to a sell off. Couple this with a trailing twelve month P/E ratio of approximately 17 and the fundamentals seem to support the story the charts are trying to tell.
Looking to tomorrow, our weekly does of jobless data is due out and is likely to be a market moving event. We've seen a lot of volatility in these numbers of late, so I'm expecting more of the same tomorrow as well. Having posted a reading of 437,000 initial claims in the previous report (and fairly significant revisions to the report prior), my gut says we'll see a number that's pretty close to this level. If this proves to be the case, the larger takeaway has to be one of a continued challenges in the labor market as both the absolute level of jobless claims as well as the moving average trends remain unchanged. But aside from this data point, sentiment should again take center stage. Having pulled back for two days, I wouldn't be surprised to see commodities bounce a bit in a bit of a relief rally. What will be of most interest to me if this rally materializes will be the scale of the move higher. An inability for commodities to maintain the majority of their recent losses would definitely send a signal that the bearish sentiment that showed up these past two days was a fleeting event rather than the larger sentiment shift I believe has occurred. This doesn't seem likely, especially considering the continued strength of the U.S. Dollar, but it's something worth keeping an eye on just the same. And among all commodities, gold appears to be the market most likely to hang on to its losses since today's decline was both sizable and pervasive throughout the session. Lastly, I want to see the equity markets make a decision and to make that decision with conviction. I thought we saw the beginning of such an indication yesterday, but I'm still waiting for confirmation. And is so often the case, the waiting is the hardest part.
Until tomorrow.....
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