The kind of bounce I expected last Friday, Market Update / NEXT WEEK is exactly what we saw and even though I expected distribution and weakness as bounces recently haven't had the umph that they use to have (they can't keep a short squeeze rolling anymore), I was a little surprised in just how weak this one was. I feel pretty good on the decision to enter URTY for an extra gain this week, but feel much better about exiting it the next day and returning to the default SRTY position which is up almost 4% since in addition to the +9% gain taken when selling it to open the URTY position which was another 3.5% on the week. The point really being the divergences were correct in not only the bounce, but in its weakness (getting out of URTY and back to SRTY).
Today started with another major company, V which is the largest Dow component by weight, giving poor guidance which has been a theme this week and this is the most important part of earnings (ever wonder why a company that missed rallied or a company that beat sold off? Guidance). Of course AMZN earnings were a disaster (AMZN is one of our core shorts that we/I was/am looking to add to).
In what many probably thought nothing of unless they trade Index futures, the CME hiked ES and NQ margins by 6 and 11% respectively. The last two days my broker has sent a list of several hundred stocks each day that they've raised margin on. While this doesn't prove anything conclusively, the action doesn't exactly come across as the CME/Brokers expecting a low volatility environment going forward such as we have had all year.
On the open, for the first time all week, the Most Shorted Index DID NOT ramp stocks, the MSI hasn't been able to hold a short squeeze all week beyond the opening pop, which again was completely missing today after yesterday's very poor relative performance of our MSI Index vs the SPX.
While it seemed there was an attempt on intraday 3C charts to close the gap in to the afternoon, no such luck, in fact even a USD/JPY ramp was useless.
This looked like a purposeful attempt to close the gap...
USD/JPY saw a positive divegrence at 1:45 which is right around the time (2 p.m.) we usually see the options expiration maximum pain pin released as most contracts seem to be settled by then. In to the close it looks like the failed ramp was being distributed in USD/JPY.
The only interesting mover in to the afternoon and close was GLD which we had expected to bounce as posted at 10:30 in GLD/SLV/GDX Bounce , this was one of the intraday charts from the post...
The Dominant Price/Volume Relationship for the components of the major averages was Price Down/Volume Down which is the dominant theme seen during bear markets. The relationship doesn't have any 1-day oversold implications which we often see with price down/volume up which typically leads to a close higher the next day on a short term oversold condition.
Eight of Nine S&P Sectors closed red, only materials closed green. Of the 239 Morningstar Industry and Sub-Industry groups I track, only 49 closed green today, a trend we have been seeing exacerbated all week.
Many breadth indicators are close to making significant lows, the Russell 2000, 3000 and NASDAQ Composite Advance / Decline lines all declined for a 3rd day in a row and the SKEW Index ticked up again today, still in the red zone for the entire month, the longest period since it has been published.
While I expect the market to make a turn lower and specifically this is very important to the Russell 2000...
There are still a great number of stocks on the watchlists I went through today that look like they could make a small bounce and set up beautiful shorts. As I said in the "Week Ahead" post, I expect a broad move lower next week, despite some short term noise, that short term noise would be the bounces that set up a number of the stocks I have flagged for trades, literally talking about very small moves, but mostly timing.
HYG's 5 min positive divegrence from last week which I expected to help bounce the market has deteriorated significantly and no longer looks like it will be an issue, however a major issue is HYG's position vs the SPX....
While you've heard me say many time, "Credit leads, stocks follow", here's a brief synopsis as to why , specifically in the current market atmosphere where low interest loans haven't been used for Cap-Ex spending by companies, but rather for a dangerous sugar rush reason....
"The last few years' gains in stocks have been due to record amounts of buybacks which makes EPS look stronger and also provides a non-economic bid to the market no matter what happens. This financial engineering - for even the worst of the worst credit - has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to re-leverage their firms all in the goal of raising the share price, not adding any value to the actual company, like I said, a short term sugar rush.
Equity prices cannot rally for long without the support of high-yield credit markets - never have, never will - as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking... it ends with equity and credit weakening together. That is the credit cycle."
While the The Week Ahead charts showed just about everything we needed to know about this week's trade, the VERY Important Update I think is a pivotal post at a pivotal moment. Next week we have some key data such as Non-Farm Payrolls, but even more important is Q2 GDP. If GDP doesn't print at +2.9% then the first half of the year will have zero growth, some would consider that a technical recession. Otherwise a recession is considered two consecutive quarters of negative growth so this time next week the US economy "could" be in recession.
Have a great weekend.
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