• Comments for February 8, 2018

    The question for now is simple: are we still in a liquidity driven market or are we in a rates driven market?

    Yesterday was a sideways market that looked bearish to me as there were negative divergences on the NQ8. These divergences forced me out of the long QLD position.



    The 10Y rates pushed higher. This also forced me out of my short Treasuries trade.





    XLRE was weaker and hence my idea to buy fixed income equities on the basis of lower rates is cancelled for now.



    The OBOS (Overbought/Oversold) indicator of the 20DMF is still in bearish territory, but a buy signal can be issued in the coming days.



    The Ratio of the sectors that are on a buy wait mode is moving higher, but it is well below the 35%-40% levels. In past years, that buy level was at 50%. The indicator had to move above 50% and a buy signal was triggered when the indicator was moving back below 50%



    We can see below that before January 2016 this signal moved often well above the 50% level and offered many buy oversold signals. In the past two years, we have never had a single one of these signals, simply because we have been in a liquidity driven market due to Japanese index investors (Japanese NIRP started early in 2016.)



    Is this environment changing? The Fed started with the QE reversal policy and we have increased inflation fears. This was the reason for the market shake out of the past days. Since US rates continue to be strong I can say that we could at any time be hit by another wave of sellers.

    However, higher rates imply that Japanese index investors are still in theory ready to offer liquidity.
    This is in theory only: is equities are too volatile, they could buy US Treasuries instead.

    Conclusions:

    I think that we are in a changing environment, but that selling was not strong enough to shake investors out, especially index investors. A continuation of higher rates will probably have similar consequences to equities as we saw on Monday. There will however be buying opportunities, but probably at lower prices.