A quiet collapse which requires attention «

    A quiet collapse which requires attention

    So far in 2014, stocks have been in somewhat of a holding pattern in the U.S., at the same time emerging markets, outside of China, appear to be stabilizing. The long bond on the Treasury side — seen here through the iShares 20+ Year Treasury Bond ETF /quotes/zigman/1480195/delayed/quotes/nls/tlt TLT -0.42% — has countered near-term the “rising rate environment” meme, despite article after article claiming that this will finally be the year of escape velocity for the economy (something only known with hindsight).

    “How many times do you take yourself to the brink of complete collapse? It’s not a real fun place to go.”

    —Bryan Clay

    I maintain my belief that fragility does remain high for global risk assets, and that tactical alternative-asset allocation is important to mitigate risks which continue to manifest in certain areas of the marketplace. While we ourselves are currently exposed to equities, there is a very real possibility that we take on a more defensive stance soon given what may be the start of some troubling signs.

    One troubling sign is that the yield curve appears to be narrowing. Longer-duration Treasurys are outperforming shorter-duration ones, here repped by the iShares 7-10 Year Treasury Bond ETF /quotes/zigman/1480156/delayed/quotes/nls/ief IEF -0.24% . Such compression tends to be more indicative of risk-off periods, as it signals that the marketplace may be re-assessing in the near-term growth and inflation expectations. More so than that, though, this is occurring at the same time a quiet collapse is happening in the retail industry.

    Take a look below at the price ratio of the SPDR S&P Retail Index /quotes/zigman/478011/delayed/quotes/nls/xrt XRT +0.19% relative to the S&P 500 /quotes/zigman/714403/delayed/quotes/nls/spy SPY -0.01% . As a reminder, a rising price ratio means the numerator/XRT is outperforming (up more/down less) the denominator/SPY. For a larger chart, please click here .

    Make no mistake about it — when you see headlines of Best Buy /quotes/zigman/219712/delayed/quotes/nls/bby BBY -0.23% collapsing in price, it is not just a company-specific story. The XRT ETF is a very broad-based ETF, and no single stock makes up a huge portion of the fund. On Dec. 23, I made it a point on Bloomberg to stress that some major moves may soon come in the consumer story, referencing both eBay /quotes/zigman/76117/delayed/quotes/nls/ebay EBAY -1.00% and the retailer ETF. Weakness, in other words, is across the board. More so than that, the ratio collapse/crash has in but a few short weeks erased over six months of alpha/outperformance.

    The magnitude of the breakdown could be indicative of some significant reassessment of what’s to come. So far, the environment and seasonality continues to favor the stock side, however, the behavior of consumer stocks is crucial to pay attention to for early signs of what could be the market questioning the Fed, reflation and the wealth effect.