Key Tactical Takeaways:
> Two of the more important signals we found in Monday's delayed CFTC CoT report had to do with gold, where hedgers have yet to reduce net shorts to levels that typically mark a major bottom, and oil, where the W-o-W change in positioning was large enough to suggest that the recent surge in oil prices may become more turbulent in the short-term.
> Although sellers continue to defend the 10Yr yield's critical 0.83% area, a closing sell-off > 0.88% is needed for the short-term trend to turn away from another test of this critical area.
> Despite historically top-heavy put/call readings and the lack of confirmation from high yield credit spreads and Treasury yields, the S&P 500 maintains short-term support to make fresh ATH against a stop of ....
> We've added longs in INO and WMG to our trade ideas sheet.
Some Quick Thoughts:
With equity portfolio managers staring at hefty November profits accompanied by solid momentum, this week's equity market action began with some welcome profit taking. For the bond market, the focus now turns to the next two weeks of data leading into an uncertain December FOMC meeting. Though it is easy to assume that the market is looking beyond the ugly covid numbers that are shaping up as winter draws closer to its start, the growing divergence by both Treasury yields and high yield corporate bond spreads to equities is something that we simply can't ignore.
As the liquidity train keeps feeding the equity rally with vaccine fast-tracking taking over the headlines, antics regarding fresh stimulus are also fueling herd behavior. Given where the equity only put/call ratio stands, however, in a normal market it would be rare for this rally to go unchecked without a better correction first materializing.
Corrections in time (i.e. when price simply moves sideways for extended periods as a form of mean reversion) similar to what the S&P 500 delivered in the 3 weeks following the 1st November vaccine surge on 11/09 are frustrating because they do not allow for dip buyers to find good entry points. Now that the indices appear to be moving higher, above the mid-November range, the divergences and put/call extremes listed above leave us feeling uncomfortable with recommending that large amounts of new money be put to work in equities that are highly correlated to the S&P 500. Instead, we continue to focus on finding opportunities in both small caps and value space, where big bases continue to see highly profitable breakouts. See our trade ideas sheet on page 3 for some of our existing and new ideas.
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