The markets most recent move up was an options expiration levitation trick. I don’t expect much more gas here unless we get some more central bank intervention soon. In the above chart advancing volume & issues versus declining volume & issues has rolled over as price continues to advance. The optimist would say that the breadth of the market should improve and the troops should follow the generals. Everyone knows that 5 stocks are leading the charge. The problem with that optimism is that credit continues to roll over. So odds are high we top out for a dip soon as 5 stocks can’t hold up the market forever. The dip could be brief like 3-5% or more meaningful. I remain short stocks and SPY as I believe that the Top in May will hold. Everyone seems pretty jazzed up about seasonality into year end and complacency remains high while bullish sentiment has returned and bears are all but extinguished. I will remind folks we had a 5% dip last December. My belief is that if we take out last Mondays Paris Terror lows we have the potential for some accelerating downside that could be more than 5%. The bulk of the Santa rally may be behind us. I expect a turn soon maybe after a little more levitation.
Basically we are slowly watching the Global Economy roll over. Retail sales in the US are looking rather grim as seen from the top line implosions of many retailers. The Inventories to sales ratio continues to climb and is now at recessionary levels not seen since the great financial crisis. Deflation is spreading from the emerging markets and energy into other areas and corporate cash flows are declining. We are basically seeing an old fashioned credit cycle maturing and rolling over. Equity valuations will not hold if credit does not improve soon. I am currently looking at Airlines to short as the charts look awful, they have a lot of debt and follow corporate profits both up and down. The first thing to go in a downturn is business travel. The airline stocks peaked late last year as corporate profits peaked then as well.
Below are several charts showing credit and business inventories:
CCC High Yield Bond Price Index
Leveraged Loan Yields
Inventories To Sales RatioTwitter