S&P Clings To Best January Since 1989; Credit Ends Wider

Tyler Durden's picture

From the close on Dec 28th (pre-fiscal-cliff), the Dow is up over 7% (for its best January since 1994), the long bond is down 3.3% in price, gold is up marginally and the USD is down marginally. From around November 2012, the current in stocks is eerily reminiscent of the same run from November 2011's dip and co-ordinated easing. It would appear that if 2011/2 was the world normalizing to ZIRP, 2012/3 is the world's central banks fighting currency wars with their ever-expanding balance sheets (and while Europe won last year in stocks, the ECB's fading balance sheet is leading its stocks to underperform a renewed Fed expansion). Credit markets are notably not buying this risk-on move (and nor is VIX) in January but JPY-cross-based carry is leading the way, so the world better hope that no one doubts the BoJ's ability top unilaterally 'win' the currency wars. Energy and Healthcare are the month's winners as JPY loses 6.4% on the month and EUR gains 2.7% against the USD.

 

ES closed down for the second day in a row - clinging to VWAP...with volume rising once again on the downturn...

 

but Trannies still the big leaders on the month...

 

The world since 12/28 (pre-fiscal-cliff 'resolution')...

 

as the S&P looks very like 2011/12 again... sigh...because valuations dont matter at all...

 

Thanks to the currency wars...

 

as since 12/28/12, we have seen JPY lose 6.4% against the USD, and the EUR gain 2.7% against the USD...

 

Unfortunately, credit markets are very much not playing along with the risk-on move in stocks...

 

and nor is VIX...

 

and Treasury bonds and stocks have recoupled - but fund flows do not show the kind of rotation everyone is calling for...

 

As Sector performance is very diverse (and seemingly barbelled, with Energy and Healthcare leading the way)...

 

Source: Bloomberg and Capital Context

Capital Context (@CapitalContext) LLC is the leader in integrating credit-market data to actively trade equity markets. From our world-renowned intraday 'CONTEXT' and 'SPY Arb' models to the daily long-short equity portfolio, sector-weight updates and tactical asset-allocation strategies, Capital Context offers sophisticated hedge-fund strategies to the active trading community.

 

Bonus Chart: Very odd divergence in the advance decline line for HY bonds relative to IG bonds... Our take is that HY bond holders are well aware of the illiquidity in their market and unwilling to dump into it - so have used CDS to hedge (see above). This has led to HY Adv-Dec holding up as IG is pulled down on rotation to new issues and some pain (and obviously far higher liquidity)...

 

This is also evident in the price of the HY Credit index relative to its underlying value... a clear bid for protection over its intrinsic value (in equities - this is like being willing to pay 1550 to buy the S&P at 1500...)


 


Bonus Discussion...

Deutsche's uber-bullish (S&P 500 target 1600) David Bianco offers some color...

"There are 9 years since 1960 with 5%+ gains in January: 1961, 1967, 1975, 1976, 1980, 1985, 1987, 1989, 1997. The avg. whole year price gain for these years was 23%. Furthermore, in each of these years the S&P 500 climbed over 19% except for 1987 given the October crash."

 

But there are exceptions

 

Three down years despite up (but < 5%) Januaries, were 1966, 1994, 2001. The 2001 bear market came despite an up January and before 9/11/01, as Tech crashed on an IT spending collapse amidst demanding valuations. This is unlikely for 2013. However, circumstances of 1966 and 1994 are cautionary. These were poor performance years owing mostly to Fed tightening. Thus, despite a strong 2013 start, we think it critical that treasury bond yields do not surge this year. An orderly and moderate ascent in yields is fine and expected, but any surge on US rating downgrades, fiscal irresponsibility, or inflation fears is a risk that warrants watching.

 

The S&P was up in January 2011 and 1H11, but it corrected sharply on the US downgrade and European sovereign debt crisis and ended 2011 flat.

So for all those awaiting the big rotation, be careful what you wish for...