A reader commented on the weekend, “TBH, being long here sure feels like picking up pennies in front of a steamroller”. I agree. While I have been steadfast in my belief of a “Last Hurrah rally” before a significant market top, that scenario is looking far less likely.
As the market tests a key resistance level, it is displaying both a negative RSI-5 divergence, which is tactically bearish, and faltering internals, which is intermediate term bearish.
There is a distinct possibility that we may be seeing a final market top in the major US equity indices this week. While the market may rally to new marginal highs, I believe that the risk/reward ratio is turning unfavorable for the bulls, and there may not be many pennies left on the road in front of the steamroller.
Risk appetite is deteriorating
Here are some of the worrisome signs that the bulls are losing control of the tape. The ratio of high beta to low volatility stocks breached a significant relative support level, indicating a significant deterioration of equity risk appetite.
In the credit market, the relative price performance of high yield (junk bonds) to their duration equivalent Treasuries is not confirming the recent equity rally. Needless to say, the relative performance of EM bonds has been terrible.
Equally disturbing is the inability of the SPY/TLT (stock/bond) total return ratio to rise after its upside breakout and pullback to test the relative resistance turned support level. This is another negative divergence that is bearish sign for risk appetite.
My inner investor has been opportunistically lightening up his equity exposure since my market warning two weeks ago (see Market top ahead: My inner investor turns cautious). My inner trader sold his long positions, and reversed to the short side today.
Disclosure: Long SPXU