The Real Thing?

The monster rally yesterday implies that we could move higher after a pullback of a few days. However, the nasty reversal today certainly makes you wonder about that possibility. Did a bank or fund get forced into some sort of liquidation today? Was it just the realization that the Fed has used up its interest rate reduction maneuvering room?

Something different from last week's monster up day and reversal was the collapse of commodities. The materials sector (XLB) was particularly hard hit today. The plot above shows that the XLB/SPY ratio (red) is over two standard deviations (purple) below its mean (green). Pullbacks of this magnitude have been good buying opportunities over the past year.

The money coming out of commodities today did not go into stocks. Did this money flow into treasuries, which were one of the few winners today? The interest rate on T-Bills has dropped to extremely low levels (~0.7%). Are T-Bills at a negative real rate of interest the way to go? Is a catastrophic collapse imminent? Is it just a lack of liquidity in the credit markets?

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