Move to safety accelerating

Choppy week with volatile price action. The market rallied on Friday on no news. This is not a sign of strength but nervousness. Behind to hood, the move to safer assets actually accelerated:

Speculations are rampant on ECB starting QE next week. Perhaps this will be "sell the news" event that finally rolls the big caps over.

Chart update for end of 2014

2014 is over. The year market another up year for SP500 and another year without -10% correction. Records are being broken. Yet, the theme for 2014 for increasing market divergence across the sectors:

Fro longer term view, the similar divergences are shown for 2011 just before the market drop but the divergence have lasted now for 12 months. Market is stretched - and this is an understatement.

Could the market stretch further. It is possible but unless the divergences are repaired, any rally from here is on borrowed time.

Weekend update 11/28/2014

Black Friday closed with ominous note: Breath deteriorated substantially and sentiment turned even more defensive. The backdrop for the turbulence is the plunge oil price the directly hurts energy sector and related high yield bonds. The high yield dropped and treasuries rose. The continuing divergence between the high yield and treasuries is the most dangerous alarm of rising risk aversion that is yet to affect the large cap stocks. Other divergences:

Against the breath weakness across variety of assets, Friday also showed a sharp move in treasuries that has previously indicated near term weakness in stocks:

All indications point to weakness in the coming week.

Re-establishing correlation between large caps and small caps

The relative under performance of small caps have been a theme of 2014. For bears, this has been indication of risk aversion and top formation. But what if the small caps were just waiting for the large caps to catch up?

Figure 1: After over-performing in 2013, the small caps have waited for the large caps to catch up.

The market is nearing a decision point: Several indicators are still divergent but the market breath and uniformity have also been on the mend. Now that the large caps and small caps have re-established their correlation, the next move for them will likely be in the same direction. 

Defensive stocks is leading into the rally

SP500 is extending all time highs at increasingly shaky market breath. Defensive sectors are leading (utilities, staples) and risk sectors are lagging (cyclicals, small caps, industries, and high yield bonds). Divergences such as this need to be resolved one way or the other. My take is that we are at or near the top.

Why? Last time we saw divergence as this was in 2011 before a correction. The divergence is more mature now but this just makes it harder for stocks to keep advancing.