Daily Wrap

After looking at the market last night with fresh eyes, the feeling I got was there were several intraday lows on Thursday or Friday (depending on the average) that saw a pretty decent positive divergence, more importantly HYG (High Yield Corp. Credit saw a positive divergence and we know if HYG runs up it can take the entire market with it.

At the same time, any bit of strength whether it be a green close like the Russell 2000's +0.99% close Thursday or a recovery off intraday lows like the Dow's 151 point drop from Thursday's close on  Friday to intraday lows that recovered to a 2 point / +0.02% gain, it seemed like no matter the scenario, whether daily price strength like the IWM on Thursday or the Dow's intraday price strength in the recovery of about 150 points to close just barely green, underlying trade in any scenario where there was some form of price strength saw negative, distribution signals.

As I said, the positive divergences at intraday lows, whether Thursday or Friday seem to have given the market a few days which is interesting as it coincides with the F_O_M_C meeting and policy statement this week (Tuesday and Wednesday) as well as GDP this Wednesday at 8:30 a.m. which will include annual revisions. Furthermore we Non-Farm Payrolls Friday morning with a whole bevy of other macro economic reports out this week including Chicago PMI, ISM Manufacturing, as well as some other odds and ends.

We found out late in the trading day today that the Treasury (as expected) sees a 30% decrease in annual funding needs. Whether you think the F_E_D may be considering a taper or early end to QE because of the cost/benefit analysis at this point, the difficulty in exiting policy and diminishing returns, the F_E_D sucking up quality collateral of which there is about to be a bunch less according to Treasury forecasts, or whatever reason, the fact is banks have seen yields rise and the value of "Unrealized Gains" in their AFS portfolios (Assets held For Sale / Treasuries), which are assets that are not meant to be held to maturity, nor are they assets held for trading, but somewhere in the middle, decline to unrealized losses. 

With the Treasury projection today of approximately 30% less issuance, there's an even greater reason now for the F_E_D / F_O_M_C to taper or cut short QE. Some say the release of this report caused the market to trade ugly at the EOD, but the fact is we were already seeing that well before the report was released, as in this post re: the IWM... "Distribution in to any strength", unless there was an early leak.

Here's a generalized look at the market scenario using the SPY as an example.

 This is the positive divergence on a 3 min chart in to the 11 a.m. lows of Friday as well as a current slight leading positive divergence.

This isn't a significant divergence by any means, but it's enough to make a market move higher over a short period, especially if HYG helps out.

 The strength of the divergence from Friday did not make it to the 5 min 3C chart which is generally considered the first or earliest timeframe of significant institutional activity. In fact the 5 min is still in a leading negative divergence.

 The big picture 2 hour chart in the SPY has a huge and very sharp leading negative divergence and at a slight new head fake high as would be the expectation and as was our expectation for this move. The 24th is highlighted, but it was the 21st of June when we saw the unmistakable signs of a positive divergence ready to reverse price to the upside as noted already.

The interpretation of these charts would be the big picture or large trend is showing significant weakness that the SPX will almost definitely not be able to recover from unless something amazing like a new round of QE were announced. The positive divergence in to Friday's lows give the market the ability to hang on, if not make some upside gains, but the divergence wasn't big enough (5 min is negative) to do much more than that.

As we have seen through Thursday, Friday and today, any bit of strength seems to be used to sell or short in to, not by retail, but smart money.

This is the kind of market atmosphere in which (as I said last week before I left for vacation when I said, "Stay on course") the highest probability trades are to short in to price strength and underlying weakness. There are very few long positions I would consider and I'd usually take even short term longs in a scenario like this, I think it's just too dangerous at this point.

As for some more familiar indicators applied to the SPY...

In yellow the indicators are showing positive readings in to the June 21st/22nd lows that 3C caught with beautiful accuracy. In red these same indicators are going negative, I use these as momentum indications on every timeframe, but they are significant on a 60 min like this chart. I have Momentum at the top, Wilder's RSI (period 6) below that, MACD Histogram (periods 26, 52, 9) below that and finally Stochastics (period 50) which I use to look for embedded signals and divergences.

As far as High Yield Corporate Credit (HYG) goes, as it is one of the most significant assets that can help move the market on a short term/arbitrage basis, and one of the more significant finds from last night, there's no doubt large "risk on" positions have been abandoned in HYG, there seem to only be smaller trading positions that can be exited quickly.

 A slightly longer term 1 min chart of HYG vs the SPX (always green unless otherwise noted) shows HYG positively  leading the SPX in white, negatively leading in red and in yellow it has formed a range where we often see institutional activity.

Intraday (1 min today) HYG is pretty close to in line with the SPX, however JUNK (High Yield) Credit which normally trades almost identical to HYG, but is not an arbitrage asset...

looks a lot worse intraday vs the SPX today.

 Here HYG on a 30 min chart shows the 3C positive divergence in to June 21st that leads the SPX/market higher and we see strong distribution that pulls HYG down (which is far from over, but seeing something more like a typical market movement/correction).

Here HYG's 10 min chart shows more detail and an obvious/strong leading negative divergence in to recent highs, HYG losing ground typically leads the market as credit traders are much more sophisticated than equity trades, hence the say, "Credit leads, stocks follow".

 HYG's 3 min chart has much more detail, a strong leading negative divegrence to the left and a strong (for a 3 min chart) leading positive divergence on the right during that flat range as is often the case.

Intraday it looked like HYG was going to lose some ground and fall apart a bit, but it turned things around in the late afternoon and produced a short term positive divergence, I WOULD NOT BE SURPRISED IF HYG MOVED UP HIGHER TOMORROW BASED ON THIS 1 MIN CHART, this should take the market up or at least give it some support.

High Yield Credit...

 HY Credit or "Risk on" credit moved in lock step with the SPX (green) for quite a while, note around April Credit diverges significantly with the SPX to make a new low for 2013 (currently below previous 2013 lows in the first quarter). This is a VERY significant dislocation, one of the largest I've ever seen which should tell you something about the volatility and size of the move coming- "Credit leads, stocks follow"

Intraday HY credit was in line with the SPX at the green arrows, it was underperforming at the red and then showed much better relative strength at the EOD, to me this looks like the market will see some upside tomorrow, at least in the early part of the day.


Other Indications....

Sentiment...
Intraday our institutional sentiment indicators held up well, in fact they support the idea I just floated above re: HYG/market seeing some gains tomorrow, however these must be kept in context, the charts that really matter are below as far as sentiment goes...

 FCT 60 min chart vs the SPX (green) shows sentiment is very negative vs the SPX, this is the worst I have seen since we've been using these.

HIO 60 min is just as bad, actually worse, so the intraday sentiment readings not only should be kept in context, but used as I mentioned above to the best advantage which I believe is shorting any price strength, I can nearly guarantee if we do indeed see any upside strength, it will show much worse negative 3C divergences which will make it easier to time good entries for our positions.

Carry Trades

 This is a daily chart going back to the 2009 lows, it's clear the $AUD as part of a carry trade has been closed out.

The same with the Euro except the Euro also had significant pressure from the ECB as well as banking regulations. Either way, the carry trade is pretty much dead and just about any market breadth indicator can show you that.

In green, "Percentage of all NYSE Stocks Trading Above their 200 Day Moving Average", in red the SPX.  In January the percentage of NYSE stocks > 200-day was 81%, during the peak in May, 71%, during the last peak, 61% and today 58%, this is the 200-day average, as the market moves higher a healthy market would show increasing breadth, not declining. A large part of this in my opinion is the closure of FX carry trades, the equity position must be closed out to close out the carry trade.

Other Arbitrage/Safe Haven assets... TLT (20+ year Treasuries) and VXX (VIX Short Term Futures)...

As I showed last week, my DeMark Inspired indicator gave its second buy signal in the VIX this year, the last one was at the low as the buy signal fired and lifted the VIX.

 The last VIX buy signal on my custom indicator was the low for the VIX and it made a run shortly thereafter. Last week's buy signal in the VIX, thus far has also been the low for the
VIX.

 This is the long term or "Big Picture" view of VXX, first a negative (2 hour) divergence brining VXX down which was seeing confirmation of price/trend on the way down, then a large leading positive divergence. It seems someone has been accumulating significant protection in VIX Futures.

TLT (20+ year Treasuries) is also a form of protection or "Flight to Safety" trade. As you know I've been interested in TLT for a while and have started a core long position in TLT, I'd like to add to it.

TLT shows a negative divergence and when we saw this at the time, I speculated that this was being done to help lift the averages to new highs which did occur, but I think more importantly a large TLT / Treasury position has been quietly accumulated, I think few people know this and this makes for an appealing long. I would prefer to leverage this position, perhaps TBT short, but I don't think that would be an easy one to get and keep borrowed shares for and I don't want to keep rolling calls, but I do think TLT WILL see a significant move HIGHER over the coming months (perhaps year). I wouldn't be surprised if today's Treasury news didn't send TLT higher alone.

As far as sector performance, Transports (IYT) which I have an open Put position in, were down significantly today.  ES/SPX futures saw a -.40% loss, which is the worst loss in a month for ES. As I demonstrated last night, Financials again were among the worst performing along with Energy, the Flight to Safety sectors, Utilities and Staples (again as seen in last night's charts) were among the best sector performers.

As far as my feeling that we have plenty of assets suggesting tomorrow see better market performance, the 1 min $AUD futures do look like they are seeing short term strength, this is very young as far as a signal and very small in terms of length, but if it keeps up, it would help the market tomorrow (remember HYG and other indications like Sentiment intraday as well as others above).

Single Currency $AUD futures seeing a positive 1 min divergence, if this holds up overnight it should help the market on the upside which should open up some opportunities fro us.

The Yen futures aren't as developed, but they are pretty ugly so that would help as well.

The Index futures aren't showing anything special that will last overnight.

As far as tomorrow goes, I think our best bet will be to look at interesting short list shorts for well times entries.

Some of the shorts on my watchlist include GS, GOOG, IYT, AMZN, XLF/FAZ (long), DE, IBM, XOM, COST, NFLX, PCLN, DDD, TJX, COF, HYG, HPQ, FDX, possibly AAPL, XLK (Tech related), JPM, USO, and others.

Some longs include: VXX/UVXY, TLT, MCP, URRE, Certain Inverse/Leveraged ETFs, Precious metals/miners, and numerous other ETFs.

Finally, also looking interesting as far as tomorrow's action is tonight's Nikkei 225 futures...

That's not a large positive divergence, but it is a nice looking one which formed in a flat range.


If anything exciting changes with futures I'll let you know.