Emergency Newsletter
Return of the Fedi
For those of you that follow me on X will have noticed, today’s posts have taken a slightly different tone - signaling a number of divergences that have caught my attention. Top of the list right now is SPY vs XLY/XLP.
In its simplest form, the blue line shows discretionary stocks (the stuff people don’t need but buy anyway) relative to staples (the stuff people buy because they need it).
Over the last few years XLY/XLP has moved pretty much in-line with SPY, offering further evidence to what we already know: we’re in a bull market.
But over the last few weeks, SPY has been making new highs (including today’s) without XLY/XLP mirroring the move. In fact, right now XLY/XLP is trading 7% off the highs made in November - making today’s move the largest divergence we’ve seen in quite some time.
Am I panicking here? Not yet.
But this is definitely something I’m paying close attention to.
Added to this, the FX market is making weird moves - with the dollar hitting multi-month lows, whilst the USD/JPY and USD/SF pairs trade like meme coins.
Here’s the USD/JPY pair for reference.
Notice the same structural shift that’s playing out now mirrors that of July/August 2024 and Q1 of last year - two instances where SPX corrected by over 10%.
As I’m not an economist, I’m not even going to explain why this is happening - all that matters is that it is happening. And if we’re being objective - prior instances suggest that this is a warning sign that deserves our attention.
Why Does This Matter?
Ordinarily, these kind of moves can easily be dismissed whenever we see the indexes make new highs - it’s a bull market after all.
But in the context of this week, I’m treating these moves with added caution.
Tomorrow we’ve got the FOMC meeting followed by mega cap earnings - two catalysts which could easily see the divergences mentioned above resolve to the upside, or break down completely.
That’s not the kind of setup I’m comfortable trading. Far from it.
In fact, I’ve lightened up significantly during today’s session - not in fear, but in anticipation. Because when the next move becomes apparent, I’d hate to be caught on the wrong side of the trade.
Tomorrow, beware of the Return of the Fedi.
Best,
Alex
Disclaimer: This newsletter is for informational and educational purposes only and does not constitute financial, investment, or trading advice. Markets involve risk, and past performance is not indicative of future results. Always do your own research, assess your personal circumstances, and consult a qualified financial professional before making any investment decisions.