Note below that previous oil spikes (green arrows) have not signaled a real change of the downtrend.
The 20DMF shows a short-covering wave, while the CTick still looks weak.
On the 10Y Treasury front, we can see that the uptrend is trying to revert back down. US Treasury rates might be bottoming.
Note that the Yen and Euro show similar behavior as they are pulling back.
The US$ seems to be gaining stability.
US equities have basically followed the move of rate differentials among US, Japanese and European Treasuries. Before Yellen raised rates, US Treasuries were moving higher than Japanese and European Treasuries, attracting money into US equities through the carry trade.
Two weeks after rates were raised on Dec 16, the market started to anticipate a reversal of this policy as higher rates were judged unsustainable in light of the Chinese implosion and distressed energy debts, all of which are deflationary.
Markets are forward looking and they might be anticipating that the Fed will move to negative rates (because both the ECB and the BOJ seem to have survived this move without causing bank runs.)
The implication of negative US rates is that Treasury rate differentials will continue to decrease, which will put pressure on US equities. To "save" the markets, the Fed will have to publicly state that there is no plan to lower rates... or the Fed will have to come with a QE4 campaign.
But is the Fed really in control of these decisions? I believe future policy hangs on the timing of the probable Chinese devaluation, which will trigger another Japanese competitive devaluation (more negative rates and more money printing.)
It should come as no surprise that gold is finally attracting money: gold offers zero interest, but this looks better than a negative rate or the menace of a devaluation. Gold is a buy on a pullback to $1200. It is now extended, which is the reason why gold miners are attracting sellers.
I would like to end this comment by posting the QQQ:SPY Figure. We can see that since early January, the QQQs have underperformed SPY. This occurred at the same time as the rate differentials started to narrow. This underperformance mostly relates to how the QQQ is constructed: the 10 largest stocks of the QQQ comprise 50% of the index weight, while the 10 largest stocks of the S&P500 comprise only 20% of the index.
Why can the lack of liquidity influence more the QQQs than the S&P500? Because the market moves on liquidity. Funds allocate more money to more liquid stocks, which means that they also withdraw more liquidity from the same most liquid stocks when liquidity is drained from the markets.
What I found somewhat "strange" on Friday is that even though we had a slight reversal in the Treasury rate differentials, the largest stocks in the NQ100 did not bounce as much as the rest of the index.
This is what the figure below shows: the 10 most liquid stocks gained on average almost three times less than the 90 less liquid. This is a sign that liquidity is not back in the markets. Valuation is simply reverting to the mean.
Conclusions:
Hard to see where this will be going. As of now, there is no sign that liquidity is moving back into equities. There is some money moving into gold, but gold is a tiny market.
The key is not whether oil continues to rise, but more how developments in China and Japan will unfold.
I find much arrogance in all these central bankers who believe that they will always be able to keep market forces in check.
