A few things have picked up some downside traction recently - from SHCOMP, SHPROP, HSCEI, SENSEX Indices in Asia to IBEX, FTSEMIB & SX7E in Europe and to TLT & MUB in the US. Each one on their own has a little story attached to it but it is a lot harder to put them all up on a canvas and try to make sense of where we are in the jigsaw. Today's note is an attempt to read off from each of the above and see if we have something to say as we build the case.

Without a doubt, the most stunning move over the past few days has come from the bond market. We did allude to this probability last week but we did not take ourselves seriously enough as we are no bond aficionados. The impact on the periphery, leading from the sell-off in US treasuries has been nothing short of dramatic. Bring up the chart of the US Municipal Bond ETF (MUB) and the sharp decline looks like the start of something big rather than a mere correction. The pace of the decline compares with that in early 2008 and we know what that eventually ended up looking like in months to come. We have no idea what this means going forward for US munis, but it sure does little to boost the hopes of a Keynesian recovery – one pump primed by governments and municipalities.

And then there is the Chinese stock market being carried lower by its property stocks. Do the authorities never look at the charts of the sector before they decide to change their interest rate policies? SHPROP has been in a bear market since the summer of 2009 and every recovery rally has only managed lower tops. This latest rally attempt has failed yet again and at the 200 DMA. With this decline, it has now set itself up for a larger move as it has lost both momentum and moving average support. Property stocks are not presaging smooth outcomes to what is going on in China. 

As we write this, European banks are probing yet new relative lows against the broader market. Pull up a weekly relative chart of SX7P and you will see that price is testing its June lows. Dare we say, there is no support beneath that relative low. Something needs to change dramatically and quickly to alter this picture as the probability of that outcome keeps increasing with every rally attempt failing to catch any upside momentum. SX7E on an absolute basis, is now beneath both its 200 DMA and 45 EMA, despite the sharp rally of 12th and 15th Nov.

Interestingly, the Energy (SXEP) sector relative chart is bumping against a downward sloping 200 DMA – a place of potential failure.

It is now Day 5 on the FTSE since the recent high and some early indications that all is not well. There is no real panic yet, but we want to start buying some protection, something that we thought we may start to do by Wed. Mapping the market's path is impossible but we sure feel like putting out some hedges for aggressive traders, in what are otherwise very long books into year end. Let's see where we close today and then we can present a list of candidates to short on a rally. It may be time to shore up the defence a bit.