For the week ending February 22, 2013, the SPX was down 0.3%, the Russell small caps were down 0.8% and the COMP was down 1.0%.
The SPX and RUT had both been up seven consecutive week and per the model's "seven candle rule" probability favored a down week. As a result the clock has been reset.
The close on Thursday was below model support and therefore all indices are now flat. It is advised to exit all longs, though further upside is possible as there is always a period of confluence in transition from an uptrend to a downtrend. But any long positions at this time would be viewed purely in the context of a short term trade.
Adding to equity headwinds is that two of three JPY pairs have now also been stopped out of their multi-month uptrend with only the USD/JPY remaining technically long though very close to stopping out.
Asset Class Correlations
For the week ending February 22, 2013, the EUR was down 1.2%, 30 year yield was down 2bp and the Aussie Dollar was up 0.2%.
The commodity sector experienced sharp selling this week with copper futures down 5.4% and oil futures (CL) down 3.4%, both of which have triggered short on the daily chart.
The model remains short AUD/USD, long DXY and this week triggered short EUR/USD.
The multi-month divergence with equity and the EUR, AUD, copper and 30 year yield remains. As a result equity may show greater relative weakness as part of any future asset class convergence. Using any of these asset classes as a directional indicator may likely produce false signals. Our preference is to use JPY pairs.
This week saw a sustained divergence with 5 year Treasury break evens which were up 1bp on the week.
Sentiment
Market sentiment remains extremely complacent though the VIX was up 13.7% on the week and showing renewed upside momentum. Implied volatility skew continues to rise, averaging 125.65 for the week and closing at 125.37, a fairly elevated level.
Skew is a measure of how implied volatility is distributed. The lower the reading the less skewed the curve, indicating a normalized distribution.
Funds Flow
For the period ending February 13, 2013, $0.5 billion flowed in to domestic equity funds while $4.9 billion flowed in to both municipal and taxable bonds. After nearly a year of continuous equity outflows, this is the sixth consecutive inflow into domestic equity funds though the amount is down sharply during the past two weeks and likely to trend negative soon.
For the month of January, domestic equity funds had a net inflow of $6.8 billion while bond funds had a net inflow of $29.5 billion. For 2012, domestic equity funds had a net outflow of $149.3 billion while bonds funds had a net inflow of $295.4 billion.
Bottom Line
All indices are now flat and in a period of confluence. It is advised that all equity longs be exited. Any additional upside, which is possible, is viewed in the context of a short term trade.
The breakdown in commodities this week and the JPY pairs needs to be monitored over the next week. Any additional weakness will likely put downward pressure on all risk assets.
