Setup for the First Quarter

A couple of interesting charts that emerged from a shuffle through the filing cabinets this morning.

1) BIX relative to SPX – looks suspiciously like the S&P500 financials are setting up to outperform the broader index. The trend break in the RSI is one prerequisite that has been checked recently:

$BIX:$SPX

Trying to reason how this might work requires a bit of imagination – US financials benefit from the flight of capital from Europe and China into the USD perhaps? The flip side is that materials and exporters take a hit by this same rise in the USD. Alternatively, the Fed is playing a game of cat’n’mouse and will in fact unleash QE3 in January (as consensus would have us believe).  In any event, it doesn’t mean that the market as a whole is about to head higher does it…

2) Market breadth – which leads us to a quick look at recent trends in market breadth. Following is a chart of market breadth capturing those hectic days of late 2008 and early 2009:

Note that during the selloff into the March 2009 lows, breadth began to signal value investors were entering the market as early as December.  First, the NYSI created a small divergence into a new low. Next, the NYSI broke its relative downtrend as the market rallied out of this low. Finally, as the market plunged into the capitulation selling, the NYSI flashed that a valuation floor had been found.

Now to a glimpse at how the NYSI is behaving today – the recent low gave us a small divergence – which has duly been followed by a relatively healthy rally. The question from here is how breadth will respond should we get the deeper selloff that seems so near to hand.