Traders Journal 7-23-12- Risk Off

The U.S. markets are set to get, in the words of a friend, crushed. The futures markets are pointing to a triple digit decline on the Dow Jones Industrial Average and a fall of more than 1% on the S&P 500, at the open. This follows world markets that are sharply lower. In Europe, the best performing index is the Swiss market, down more than 1% as of this writing. Both the Spanish and Italian equity markets are getting, well crushed. The IBEX 35 is sporting a decline a 3.8% while the FTSE MIB index has fallen a whopping 4.2%.

The above charts show the Ishares ETF's for both Italy (Ticker EWI) and Spain (ticker EWP), respectively, as of last Friday's close. However unlikely, we shall see if both can hold near supports levels. If the supports levels do not hold, there is no historic downside support for the EWI, swing point around $18 or $19 on the EWP. Provided that the Spanish and Italy equity indexes will continue ti move in tandem, our shot-in-the-dark guess where the EWI could find support is around the $8.5 level.

The culprit in today's decline appears to be the a negative shift in investor sentiment, as the risk-off trade is most definitely on. Yields on the Spanish 10-year bond are well over the 7% level and are trading up more than 20 basis points to nearly 7.5%. The Italian 10-year paper is trading up a similar amount (up 18 basis points) and is yielding 6.3%.

In contrast, the risk-off trade again appears to be pushing traders into U.S.-based assets. The yield on the 10-year treasury is trading at all-time lows of 1.41%, a five-basis point decline in yields. One would think that the dollar-index would benefit from this, and you would be right. The UUP (the Powershares dolalr bull index) caught a bid last Friday and traded up 70 basis points. The gains appear set to continue, and the UUP is up slightly in the pre-open, trading around $23. The $23 level looks to be an important inflection point on the UUP, and should be watched carefully for how traders react around this level.

On Friday, we further reduced our long market exposure and moved some positions into cash. It continues to be our belief that the equity markets will see correction of uncertain magnitude. We laid out our case in a previous post here- http://tradingjournalstockjunky.blogspot.com/2012/07/traders-edge-7-20-12-down-she-goes.html