Oh Canada

There's been a spate of articles on Canadian banks this past week -- perhaps that's a sign to sell. But here's a look at the market capitalization of North American banks from Yahoo Finance. RBC is number 3, while TD and BNS are numbers 6 & 7. For some reason Bank of Montreal doesn't show up on the list, but their market cap is about $12 B, which would put them tenth spot.

Looks like we might rally for a bit

Vix is a pretty reliable indicator of whether equities are in an uptrend or a downtrend. In particular, when Vix is below its 20 dma, the markets usually are rallying. Today, Vix once more broke below its 20 dma, and by the looks of it, Vix is heading lower (top panel).

The equity-only put/call ratio (CPCE) confirms this viewpoint. The 9 EMA of the put/call ratio after rising last week, appears to be heading lower, which is bullish for equities (blue line, second panel).

I've picked up another technique for utilizing the CPCE to mark intermediate tops and bottoms from Cobra's Market View. It involves drawing descending trendlines from highs in the CPCE (which correspond with lows in equities). After these highs in CPCE, the markets tend to rally, leading to successive lower highs in CPCE and hence the descending trendline. When CPCE finally breaks above this trendline, that marks an intermediate-top. The technique appears in the second panel, with the raw CPCE as the grey line. Also, the technique only works with closing CPCE numbers; intraday spikes don't count. For a better explanation of the technique, see Cobra's post.

Both Vix and CPCE are presently suggesting that equities are rallying. This picture could change with one hard day of selling, but till then, I'm long.

I would like to see the Yen weaken, but Treasuries have been selling off, and that is also supportive of equities.

CPCE analysis -- is the top in? is the bottom in?

This is in response to a nifty put/call ratio analysis presented by the Financial Ninja. His analysis uses the CBOE put/call ratio and suggests that a top is being put in, not a bottom.

I prefer the CBOE equity-only put/call ratio, which I think might give a truer signal of traders intentions. I've repeated The Financial Ninja's analysis using the equity-only ratios ($CPCE on Stockcharts instead of $CPC).

Like the Financial Ninja's method, this method does a good job of identifying the majority of tops and bottoms since 2007. A closer comparison of the two ratios might suggest one or the other is better a picking up a couple of the highs and lows around the turn of 2008.

The real difference in the methods, however, is the $CPCE is not let looking like it will call a stop (it's close, having started to turn over, but its not quite there).

I'm not sure which indicator is more accurate, although I am partial to the equity-only put/call ratio

Fed's Open Market Operations

Amazing picture which I have to repost from Alea's FRBNY: Domestic Open Market Operations during 2008

Credit indices

The Credit Default Swap indices have been improving this. Even with today's sell off, these indices appear to be heading south -- which should be supportive of equities.

Here's the US Investment Grade Index (from Credit Derivatives Research). By the looks of it, this index put in a lower high -- a lower low would be bullish

CDR's US High Yield index is on the right, a head
and shoulder's formation.

CDR's Europe Investment Grade Index is on the left. Another head and shoulder's formation.







CDR's Europe Crossover (mostly high yield) is on
the right. This is the worst performing index --
it has not yet clearly turned over, a new high would be bearish for equities.




In spite of today's sell off in equities, all four of these indices have signs of improvement.

Markit's ABX and CMBX's indices were also showing signs of improvement, but today they paused. Here's Markit's CMBX-NA-AAA 4 index , it bounced off of the previous lows.

10 year yields jump

The Fed announced that they were "prepared to buy Treasuries" and it appears the market wants to test how serious the Fed is. In the words of Across the Curve, "tarders are now enganged in a game of financial chicken with Federal Reserve as traders attempt to force the Fed's hand." And with that, 10 year yield jumped today.

It is unclear as to whether this is supportive of the broader stock market. Have yields jumped because of excessive supply? Or are increased yields indication of a broader appetite for risk (and yield)?

Signs of improvement - ABX & CMBX indices

As I posted on Thursday, Markit's ABX and CMBX indices have been strong this past week, with both indices pulling back before reaching the extreme levels reached last November.

Markit's AAA ABX indices appeared to have made a higher low last week, but after nitially advancing, have paused. Still, these indices are showing positive divergence to SPX. Here's Markit's AAAA 07-2 series, with SPX (from Stockcharts) superimposed in green



Similar story with Markit's CMBX indices, although these indices have continued to improve all week. Here's Markit's CMBX AAA 4 index (which shows price). I've superimposed the inverse of SPX in blue. Again, note the divergence.

Signs of improvement

While the bad news has been relentless these past few weeks, there have been signs that a recovery is just around the corner. Numerous correlational indicators have improved markedly since New Years, even in the face of the weakness in equities these past two weeks. These indicators include:

A huge decline in the A2/P2 spreads in 2009 (Calculated Risk) indicating that credit is beginning to flow again;

An increase in M3 Money Supply, indicating that the Fed's efforts to reinflate are getting traction;

An increase in 10 year Treasury yields, indicating an increase in risk appetite;

Bullish moves in silver and crude, silver in particular has been tightly correlated to SPX;

A weekly drop in the cash holdings of money market mutual funds, which might indicate that cash on the sidelines is coming back into the markets;

Continued improvement in the BDI, suggesting that global trade is starting to recover;

And strength in Markit's ABX and CMBX indices, again measures that are correlated to SPX.

All this is bullish for equities, although some indicators are becoming overbought (like TRIN from Matt Trivisonno)

Signs of improvement - Money supply

While there were signs that the monetary supply was contracting all of 2008, this contraction accelerated during and after the collapse of Lehman Brothers. The Fed has frantically tried to arrest this collapse by slashing the Fed Fund rate and through various liquidity schemes, moves which were mirrored to varying degrees by other other central banks. It appears that these moves are finally gaining traction, with M3 measures starting to increase again this past month.

Below is a chart of M3 from nowandfutures.com. I've added SPX (from Stochcharts) in red, note the correlation between SPX and M3 growth in blue). Growth M3 has accelerated this year, which, given the previous correlations, is bullish for equities.

Signs of improvement - 10 year Treasury yields

Treasury yields, after plummeting through November and December, have been moving higher for the past month. The move up in yields this past week in the face of continued weakness in equities, suggests a slow increase in risk appetite.

Mind you, the increase in Treasury yields was also driven by in increase in issuance by the Treasury department, as well as Geitner's "China Manipulates" comments. Still, as the chart below shows, 10 year yields are strongly correlated with SPX, so last week's rise is bullish.