Friday, April 20, 2018

Risk Parity Unwind Again

Yesterday was another risk parity derisking day.  Bonds started selling off and stocks couldn't hang on to the previous days gains and promptly sold off as well.  The higher commodities higher stocks correlation has been obliterated.  That was in effect during the crude oil panic in 2016 but now that Brent Oil is above $74/barrel, you are getting the other side of the picture.  It isn't low oil prices causing high yield stress, but higher oil prices causing bond weakness and fears of higher inflation and a tighter Fed.  Higher oil is now the enemy of the market, and from a seasonal perspective, oil should trade higher into early fall.  But speculative positioning is heavily long, so its a tough call.

We have a buyable dip after the bottom from early April.  These bottoms usually provide a grace period of about 4-6 weeks before being vulnerable to big selloffs.  That gives us a time window of early May to mid May for the market to grind higher before it tops out.  There is strong support in the SPX 2680 area, which was the high of the big 2560-2680 range that the market was stuck in for 3 weeks, as bad news after bad news poured into the market.  I would be a buyer of any dips today that bring the market towards yesterday's and the overnight lows of 2683. 

The bond market is trickier, because it is acting extremely weak even though equities can't surge higher.  Watch crude oil here, if it continues to go higher, that will pressure bonds. 

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