I am a fan of correlation. While I don’t think anything is ever correlated forever, there are times when it can be most useful. I will usually use the fancy word “proxy” both because it sounds better and it rhymes with “foxy”. You know how I roll.
The doldrums of summer have been volatile. The ONN/OFF action can make you dizzy. Right now markets have easing from China, a fresh new (just like the old one) Unlimited Dollar Funding Machine (tm), and economic numbers that don’t suck. Sentiment amongst market leaders has turned positive and, well it’s the end of the year.
I agree. My line in the sand for being constructive on longside of the market is S&P 500 above 1230. Seems 1240 became the new floor today. But there is another signal that makes me think a more aggressive move up in the indices is at hand.
Defensive sectors serve as a haven, but you have to find the right ones. Here is what I am looking at.
I highlighted as a long idea the stock RAI (Reynolds American Inc) a few times. Here is the chart:
After this weeks intervention, as strong as this chart is, it got me thinking. Are cigarettes a correlation to the risk on/risk off trade? Maybe.
Via Yahoo charts (yes I still Yahoo!; I like the look of the comparison charts) here is what the last 6 months looks like for RAI vs S&P 500:
And a 3 month:
Please notice that in August and every time after the space between RAI and the S&P has served as a great market timer. Note the late September gap and how it caught up. And again the huge gap of mid November that closed.
Topping pattern in a strong stock that is a proxy for the S&P, now converging. Keep an eye on this relationship. It’s worth watching.
Have a good night.