Market Journal: Decisively Bearish Day
Today is the mirror image of last Friday's bear trap.
Discussion
HY CDX continues to negatively diverge from a buoyant SPX, XLU continues its pattern of early day weakness getting gobbled up over the rest of the day, VVIX is elevated and sticky, breadth is decisively negative, and the “Fed Call” remains intact as evidenced by Mary Daly’s unscheduled appearance yesterday afternoon and a hawkish Waller last night. But beyond all that, today is different because XLP joined XLU in the pattern of a weak morning followed by persistent strength, and XLV built on its early gap up.
But perhaps the most important event of the day was Mohamed El-Erian stating that “You cannot get in the way right now of the soft-landing narrative - that narrative is building momentum.” El-Erian is one of the single greatest contrarian indicators in the market today, so this emphatic statement is NOT to be taken lightly.
With market sentiment having absolutely blown out to the upside, there is ample room for the bullish “tree” to be shaken in the coming weeks so that the newest bull market participants begin to question the validity of the soft landing fairy tale.
Exhibits
HY CDX negatively diverging.
XLU continuing to show signs of relative strength life.
Breadth decisively negative.
December Fed Funds back up above 530 post-Waller, and the 3y/10y UST curve beginning to invert again.
And, importantly, XLP and XLV have joined XLU in the defensive price action.