Caution Kicks Off the Week

A short post this morning as I will be traveling a bit today for meetings.

With the major equity indexes down around 0.50% at the open this morning, it's clear that investor caution (or lack of bullish conviction) is setting the week's early tone.  Europe, once again, is proving to be a large source of the negative sentiment as the prospects for some sort of bailout of Portuguese sovereign debt is climbing and garnering a greater portion of investors' focus.  Readers of this blog should not be surprised by this development as I've been pointing to this as one of the lingering concerns that would likely keep prices under wraps.  That this issue decided to raise its ugly head at this particular time is interesting as these concerns have been fairly well known.  My guess is that we're beginning to see the shine come off the recent rally in equities and commodities as investors are beginning to seek out and focus on bearish data points in support of their changing sentiment.  With last week's trading in the equity markets failing to follow through on January 3rd's sizable rally, it seemed clear to me that conviction was waning.  Now with this 'news' coming to light and pushing share prices lower, it seems that we are entering the corrective period I've been anticipating for the past three months.  To be sure, it's too early to make this claim definitively as it will take more than an hour of trading (several trading days, in fact) to confirm any directional shift.  But with gold refusing to drop (up slightly so far this morning), Treasuries firming up over the past week, and equity prices unable to follow through on last Monday's pop, I think these markets collectively signal a shift in investor preferences towards more risk-averse asset classes.  And as the past three months has clearly demonstrated, sentiment is often more important than underlying fundamentals, which makes markets prone to excessive moves in either direction.  So too will this be the case with the next corrective phase.

For the rest of the session, I'll be keeping an eye on gold, Treasuries, and the U.S. Dollar Index (DXY) for continued signs of increasing risk aversion.  Having pulled my short gold position last week, I'm now long the yellow metal in an effort to capitalize on the potential shift in investment preference towards 'safe haven' assets.  Also worth noting will be the trade in the energy shares today.  With news of mergers from Dow Chemical and Duke Energy out this morning, this further increases my concerns for the energy complex over the near term as I view M&A activity as a largely contrary indicator.  With crude running up sharply over the past few months, it's clear to me that firms are playing catch up rather than getting ahead of the curve.  And as always, the close of the major equity indexes will tell us a lot about just how much conviction is underpinning this environment.  For the past quarter, intraday selloffs have been met with robust buying that has kept net movements largely unchanged.  We'll have to wait and see if this trend holds yet again, but, if not, this could be yet another sign that risks are shading more to the downside rather than the upside.

Until later.....