Market Outlook

For the week ending March 1, 2013, the SPX was up 0.2%, the Russell small caps were down 0.2% and the COMP was up 0.3%.

All indices triggered short earlier in the week. The price action the latter part of the week is viewed as a normal countertrend rally, prior to the start of a sustained downtrend, though a clear loss of downward momentum has resulted. Therefore additional upside cannot be ruled out and stops must be honored.

One major equity headwind this week is the short trigger of the AUD/JPY and EUR/JPY though the USD/JPY remains flat, and not yet triggered short. The strong USD (DXY) is likely fueling this final rally of the USD/JPY.

These pairs needs to be monitored closely, as they fund the capital needed to sustain and or push equity prices higher. In simple terms, they are a measure of momentum.

Asset Class Correlations

For the week ending March 1, 2013, the EUR was down 1.3%, 30 year yield was down 9bp and the Aussie Dollar was down 1.1%.

The commodity sector experienced additional selling this week with copper futures down 0.8% and oil futures (CL) down 2.5%, both of which are triggered short on the daily chart.

The model remains short AUD/USD, long DXY and short EUR/USD. The current DXY profile is very bullish and a move to the mid 80's is possible.

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

Volatility returned with the VIX up 8.4% on the week and 34% on Monday alone. Though the VIX did pullback towards the end of the week it is starting to show upward momentum while holding model support. Implied volatility skew remains high, averaging 124.89 for the week and closing at 128.19, 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 21, 2013, $1.1 billion flowed in to domestic equity funds while $4.7 billion flowed in to both municipal and taxable bonds. After nearly a year of continuous equity outflows, this is the seventh consecutive inflow into domestic equity funds and a rise from $0.5 billion last week.

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 equity indices are now short, though the price action towards the end of the week has resulted in a clear loss of downward momentum. Equity markets have become extremely volatile and additional upside cannot be ruled out. Therefore it is advised that stops be honored, regardless of one's qualitative view. It is also important to watch the JPY, both futures and pairs to gauge overall risk sentiment.

About The Big Picture: All technical levels and trends are based upon Rethink Market Advisor models, which are price and momentum based. They do not use trend lines nor other traditional momentum studies.

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