Wednesday, April 11, 2012

DAX and SPX Recoupled

Many investors had a nagging feeling that Eurozone debt crisis is not over, but merely postponed by LTRO. They were correct. The developments in Spain and Italy are now getting full attention of the market. But it is important to point out that this latest phase started in March and was evident in roll-over of European equities, while being completely ignored by SPX. Sovereign bond yield spreads of aforementioned EZ peripherals vs core are quickly becoming the leading charts. Due to this, ECB and/or EFSF are expected to calm investors down for a bit as soon as they step back into the bond market to put out the fire. I think equity shorts may decide to cover prior to or on the intervention.

My best signal will be DAX futures holding 6450 horizontal support. Why DAX? While SPX divergence vs many other risk assets has been wider and longer, it has been very closely correlated to DAX from the bottom in October, and decoupled from it for only brief period of time in March, when SPX made a higher high and a higher low but DAX did not. You can see from the chart below that they now recoupled. DAX futures 6700 support was broken (coinciding with SPX 1370 break) and price is currently backtesting from below. If resistance holds and DAX proceeds down to lower support, SPX will follow. With this and possible ECB/EFSF bond intervention in mind, it would be appropriate to assume that if DAX futures hold 6450, SPX futures may find support then as well. Keep your eyes on this chart.

DAX futures vs SPX futures
click on chart to enlarge

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