Leading Indicators

First for those of you who know of Dan Loeb of Third Point, he's returning 10% of client's money, he's essentially saying the market is dead, the global economy is dead. If you don't know who Dan Loeb or Third Point is, let me just say there are two packs of sheep, the retail sheep that follow price and the hedge funds that follow each other, none willing to strike out on their own because they have a fat paycheck they don't want to lose. To underperform the S&P is apparently acceptable, but to underperform the pack is not. Dan Loeb is one of those who strikes out on his own and the pack follows him.

If you need proof, look at the -45% loss opr -390 point loss AAPL took, one day AAPL was the darling of the market and could do no wrong (we already had severe distribution signals in AAPL and had a core short there) and the next day all the hedge funds were trying to all squeeze out the same tiny door all at once, the reason.... AAPL was no longer on Third Point's top 5 holdings.

That's who Dan Loeb is. In addition to returning 10% of client capital he also said they have been selling equities. I think last night's post was perfectly times because the longer term breadth indicators proved that more stocks were falling below their moving averages as the market averages went up, that only happens when there's serious selling and those are the same 3C signals we've had for some time. Another fund recently said, "We have been selling anything not nailed down for the last 15 months", again market breadth doesn't lie. The 3C signals have been there just like they were there in AAPL when this happened.

This 5-day chart shows the decline in AAPL, that's a -390 point move in 8 months of nearly half of AAPL's value, -45% and all started because of Loeb although we had clear distribution signals and even a core short at the time (which I got too fancy with trying to trade around it when the Loeb news came out and the panic selling started).

Last night's charts are a good reference.

As for today, the SPX is up +.55% while the spot VIX is up almost 1%, something not right with that picture? I have to say I'm getting killed on some VXX calls, but it is sure tempting here to either go for a UVXY long equity position or a December VXX call.

 If I invert the green SPX price, VXX should move exactly the same or below the green line if it is weaker, obviously it is stronger as it has been for several days, that's why the Spot VIX (which moves opposite the market normally) is up vs the market.

This chart of 15 min VIX futures also tells us why, instead of making new lows as you'd expect, VIX futures are making a nearly perfect and large rounding bottom, the 3C leading positive has been added to aggressively today, pro's are reaching for protection, hedges or straight up long trades.

While we are on Leading Indicators, some other things to note...

 I showed last night in the post linked above how commodities were a Leading Indicator vs the SPX here in green, once again today commodities  are underperforming and continue to work on that leading negative signal, there was a positive leading signal in to the 10/9 lows.

 Sentiment as shown last night in several different timeframes is leaking off again today rather than follow equities.

One of the most effective Leading Indicators, Yields gave a strong leading positive signal as we were looking for right in to the 10/9 market lows, the leading negative signal of the last several days just got a lot worse today with a new leading low, well below the levels that called the October 9th bottom in the market.

 It's hard to say where you might consider a reversal process to start, I thought the numerous odd/bearish signals on Friday Oct. 18th was an obvious place, I used a simple indicator that you can improve upon almost any indicator by simply applying it, but it's not in fashion with all of the latest stuff out there to sell books, but a simple ROC (Rate of Change) shows the change in character in the SPY both at the leading positive low/bottom and recently.

You know I look for a reversal process, I don't believe in or at least I know that the majority of the time the market doesn't just reverse, there's a process and it is proportional to the stock's trend, previous bottom and character. One of the big things we look for is the head fake move as a timing indicator, it usually occurs 80/% of the time just before a reversal. Yesterday I thought the Non-Farm Payrolls this morning could give us that head fake move which I describe as looking like an Igloo with a chimney, like the white line I drew in above. I was looking for the exact same thing in the XLF/Financials short yesterday as you can see here. From this post yesterday...

"I'm not going to add any more exposure, especially a time sensitive option position without a concession from the market to reduce the premium and the risk on the position, that means an upside head fake move and I think there's time for one" 

We'll take a closer look at Financials shortly.

 This is my custom NYSE / SPX TICK Indicator, I have the entire cycle/trend from the 9th, it should see the TICK histogram rising early on and toward the end the same falling as we see starting right around the 18th, so I think it's fair to draw in the start of the reversal process right about where it is.

As for my DeMark inspired custom Buy/sell indicator, with simple yes/no signals, this daily chart of the SPY shows past cycle tops called, we have one now too, but how serious? Remember the IWM/Russell 2000 should lead all risk on moves, in fact whole retail thinks and media would have you believe the S&P 500 is the bench mark, if you listen to Bernie's Congressional testimony, he constantly refers to the Russell 2000, I think it's an obscure index for those who are not familiar with the market, but his use of the R2K I think was not a slip of the tongue, but habit.

I've considered the R2K's performance in an upturned as a leading indicator, it was only in the last year I found out that Bernie too pays the most attention to the Russell 2000.

This is a 9-day chart of the Russell 2000, the longest I can go before a monthly chart. Note a serious buy signal at the 2002/2003 lows that started the 5 year bull market, the last bull market that had rising volume with rising price. There are a number of smaller sell signals that correspond with rather large corrections (remember each bar is 9-days). The 2007 top is called twice in succession, that's a lot better performance than the Hindenburg Omen. Then the 2011 -20% decline in the market, it is interesting just how large the current sell signal is, I have found these do have some correlation to the following trend.

I think that this is probably not quite over, right now I think the tactical entries are the most important part of this phase, which means signals have to scream.

I'll update you on what those are. I have no intention of closing the SPXU, SRTY trading positions, nor the VXX calls.