Play On

The guys with stock to sell are continuously pumping the idea of a “Santa Claus” rally. It is true that there is a seasonal tendency to rally into the end of the year. But seasonality is a statistic, not a prediction, even less a sure thing.From the Big Picture, quoting Bill King of Ramsey Securities:

“An inordinate number of traders keep buying dips and playing for a rally. They apparently adhere to the view of Carl Spackler (Bill Murray) in Caddy Shack. “I’d keep playing. I don’t think the heavy stuff’s going to come down for quite a while.”

As we have warned for months, the current environment is very similar to 2008. In August 2007 the global financial system collapsed and the global economy was in contraction. But stocks kept rallying because equities always get it last and are susceptible to hope & hype.

As the financial crisis worsened, stocks kept trucking. The DJTA hit an all-time high in July 2008. At the time the US was at least a couple quarters into the worst economic decline since the Great Depression and the financial system was imploding. The main difference now is sovereign governments are in crisis for bailing out their banks and economies; and central banks are left with only one option – to go Weimar.”

I track the HYG/TLT ratio, which is a rough indicator of high yield spreads and is historically quite well correlated with the stock market. It has fallen a lot, with essentially no reaction from stocks. This is a significant divergence.

The WSJ notes the same thing on a shorter term basis:

All in all, the US stock-market selloff of the past couple of days has not been nearly as bad as it could have been, given that credit-market stress indicators are pushing to levels not seen since the 2008-09 crisis.

It might only be a matter of time before stocks catch up, however.

The US market has been buoyed by a string of better-than-expected economic reports that have helped encourage the belief that the US is a relatively safe haven, insulated from the problems of Europe.

But these data are coincident, or lagging, data at best, warns Mike Darda of MKM Partners. Leading indicators are found in the credit markets and are pointing to tighter financial conditions — and lower stock prices — in the future:

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