Shrugging off Italy's rating downgrade (somewhat expected but continued negative outlook), funding stress in Europe (Libor levitating and Swiss/French banks divergent), cuts in global growth expectations (IMF and World Bank), concerns over systemic risk contagion (ESRB and World Bank), and escalating rhetoric in Sino-US trade wars, US equities have managed to reach up to Friday's highs as rumors of AAPL being added to the Dow seemed enough for hapless traders.
But, like a broken record, we note that the new highs in ES are being accompanied by new lows in 2s10s30s, near day's low yields in TSYs, day's highs in gold and silver, and multi-day lows in copper - all seems to make perfect sense...
Aggregating many of the risk-on drivers, CONTEXT is clearly telling a different story from US equities and now as Europe closes (having benefited from the modest and now ubiquitous ramp into 1130ET), we are seeing sectors begin to disperse significantly with Utilities outperforming - hardly a signal of broad strength.
Chart: Capital Context
SPY also looks expensive relative to HYG, VXX, and TLT and while today's roll in CDS markets puts some odd technicals into play, we note the skew remains wider (i.e. indices are trading wide of their fair-value in the new series) suggesting investors are looking to roll their hedges/protection/shorts as opposed to buying into this strength.
The main support for ES seemed to be the general shenanigans in FX markets with swissy losing ground and very volatile on re-peg rumors. JPY remains strongest relative to the USD - repatriation never really a signal of strength as carry gets unwound. The dollar (DXY) is still 0.7% higher from Friday.
It seems to us that there is significant evidence that this strength in US equities is not well supported up at these levels and while it made some sense to fill the gap from Friday's close (and hope seems to remain for Bernanke to save the day) - the USD is not crashing (though we admit gold is rallying) and TSYs are not signalling anything along the lines of a large-scale "Twist" - no matter how hard Goldman tries to pressure Bernanke to throwing the kitchen sink at it.