Zerohedge noted that the price action in equity, currency, commodity and credit markets today was suggestive of a broad de-risking rather than mere profit taking. But then again, Tyler's a little biased and always loves to see the markets sell off.
In tonight's post, I'll examine some charts and explore in greater depth today's market action.
In an interview over the weekend on Financial Sense, Jim Puplava and David Nicoski discussed relative strength among the various sectors of the S&P 500. Thus far in 2012, defensive sectors such as utilities, healthcare and consumer staples have lagged sectors such as technology, financials and consumer discretionaries. This is a marked departure from 2011 when defensive sectors outperformed. Sector rotation took place on the first trading day of the year and these sectors haven't looked back -- until today.
The following is a daily ratio chart of the utilities ETF vs. the consumer discretionary ETF. A falling ratio in this case signals that the consumer discretionary sector is outperforming relative to the utilities:
I've circled the first trading day of the year in red. Investors were clearly bullish on the US economy going into 2012 and couldn't wait to ditch the defensive trade of 2011. The ratio trended lower until recently as consumer discretionary outperformed the utilities. Interestingly, today's sell-off lead to a reversal in this ratio and now investors are pouring back into utilities and out of consumer discretionary. It will be interesting if this has the makings of a new intermediate trend in the equity markets. I suspect that if markets are weak over the intermediate term, defensive sectors will be back in vogue.
The ratio of the healthcare ETF XLV to the financial ETF XLF shows the same pattern:
I've shown the ratio chart between the corporate bond ETF JNK and the Treasury bond ETF TLT previously in this space. I think it warrants another look today:
The ratio bottomed in early October with the US equity markets and has trended higher since. It seems clear to me that price has broken down out of the rising wedge today. I find it somewhat interesting that the ratio topped in late October and hasn't been making new highs in 2012.
Changing gears, here is a Palladium which had a big sell-off today:
I don't pretend to know much about the palladium market, but from a technical perspective today is quite ugly. After more than quadrupling off its lows in late 2008, all with little if any fanfare I might add, palladium has been weak for the last year. I suppose it shouldn't come as a surprise that it was the best-performing precious metal between late 2008 and early 2011 (simply because it went largely unnoticed even in the precious metal friendly circles I follow). A consolidation is healthy from a longer-term point of view, but it sure looks to me like it is headed for a test of $600/oz in the short-term.
Here is the daily view of gold I've been following and showing here:
I noted last week that the gold price looked like it may want to carve out the right shoulder of an inverse head shoulders in the coming weeks. Today's action suggests that may turn out to be the case. Of note, gold today fell through the $1,681 angel. I think a test of $1,650 is possible in the short-term. In the intermediate term, if the markets decide to go into 'risk-off' mode, $1,600 is certainly not out of the question. Look at the chart above; if gold drifted lower in the coming weeks but found support at $1,600 wouldn't that be wonderfully constructive from a technical perspective? It would also mean that many investors in the GDX and GDXJ companies would be jumping out of windows, which would be wonderful for buyers like me, of course. Time will tell and price is king.
The technical story with silver is similar to that of gold:
Silver could not maintain a weekly close above $36.00 last week and has since reversed emphatically to the downside. Wonderful! If the scenario I laid described above for gold plays out, I'd be shocked if silver didn't follow suit. I'd expect it to find support at the nice round number $30.00. If so, again, wouldn't price trace out a beautiful head and shoulders bottom? I'll be on the look out for this in the coming weeks and I'll be sure to documents whatever happens here on this blog.
Sources:
Zerohedge -- Financials Implode as Volume and Volatility Explode
Financial Sense Newshour -- Technician David Nicoski
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