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With stocks bouncing back, and the economy showing signs of not dying, you may be tempted to finally relax a little bit, and get some sleep, feeling confident that 2011 is more likely to be a replay of 2010 than 2008.Maybe.
But even amidst the positive energy of the past two weeks there were red flags popping up.
The first is extreme correlation: Even on the good days, EVERYTHING that’s not the dollar is going up. We keep pointing this out, that gold, for example, has been doing the exact same thing as stocks day in and day out. But it’s not just that. Gold, Swiss Franc, the euro, equities, copper, silver, etc. all moving the same in lockstep. One day the dollar is down and they’re all up, and one day the dollar is up and they’re all done.
The general belief is that extreme correlation is a sign of market pressure — of an unhealthy market that wants to snap.
And in fact there are others signs of this as well.
Various measures of funding strain, like LIBOR rates, continue to shoot up, with no slowdown, basically ever since the beginning of August.
Of course, a little perspective is needed on this front. We’re still nowhere near as bad as where things were the great financial crisis.
Bottom line though: There ARE signs of worsening strain on the system, persisting even as things have gotten better over the last few days. Until you see correlations fade and some of these bank funding measures improve, better not turn your back.
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