Daily Wrap

Today the SPX made a new all time high on a +0.49% gain as did the Dow on a +.63% gain, even though intraday trade was as flat as a nail, at least until the afternoon push. However, I wouldn't be breaking out the bubbly or hitting the panic button.

 First, as the SPX (daily chart above) makes the new high, it's in to the "Igloo with Chimney" head fake move we have been predicting and waiting on for over 2 weeks now. The 3 stages of a 4 stage cycle are evident, from stage 1 accumulation early August to stage 2 mark-up on 8/11 to stage 3 distribution / top and the Head fake move that we see 80% of the time. Even when the SPX was making lower highs/lower lows, we still expected a head fake move as a matter of concept and probabilities as we see them about 80% of the time and the larger the range (stage 3 top) and more visible the asset (SPX is as visible as you get), the more probable the head fake move, but THEY ACT AS EXCELLENT TIMING INDICATORS FOR THE END OF STAGE 3 AND TRANSITION TO STAGE 4  or conversely from the end of a stage 1 base to stage 2 mark up as shown earlier today with an inverted Igloo w/ Chimney head fake on an upside reversal.

Stage 4 decline is the next move expected.

However all is not good news , even among price only indications...

 The Russell 2000 is gaining a lot of attention from Technical Traders as it's only about a day or two away from the infamous  "Death Cross", when the 50 day (yellow) crosses below the 200-day (blue).

One of the more notable issues here beyond the death cross that will get traders to react to the technical concept, is the larger century old confirmation concept presented by Charles Dow. The fact the Russell is not confirming the SPX is trouble, in fact in a risk on move, the Russell should lead the other averages, so more than a few issues there that are problematic for even the most basic technical trader.

 The Russell 2000 is at a -0.35% loss for all of 2014, it's not the loss that is significant, it's the change in trend and character from a clear uptrend that changes character as price peels away from the trendline on the upside, an event that often "looks" bullish, but almost always is a red flag warning of a major change in trend and while the R2K is not in a primary bear market yet, the trend has certainly changed from 2013's (and before) +37% gain to a -0.35% loss.

 This is my new VIX Inversion Indicator, I'm showing it with the red areas being buy signals just to show what they are on the next chart. The last buy signal was at the August cycle base in early August as we warned July 31st.

As for the chart above, this is the SPX/R2K ratio indicator which "should" confirm. At the far left at a stage 3 top price in the SPY is rising, however our SPX/R2K ratio is negatively diverging which sent the SPX down 4%, -2% in one day alone on July 31st and sent the R2K down -8%. From there as the SPX heads slightly lower early August as 3C forms a positive divegrence, the same indicator puts in a strong positive divegrence calling a base/bottom. In to stage 2 mark-yp, the indicator calls another divegrence as 3C shows distribution in to higher prices and we enter stage 3.  You can clearly see we have one of the strongest negative divergences in the indicator right now in to today's new SPX high. This indicator has been remarkably accurate and combined with 3C and leading Indicators like HYG, it is near bullet proof.

As for the averages today, I showed several times how incredibly flat trade was as if it was just trying to hand on either to the new high or appear strong in front of the Alibaba IPO tomorrow which benefits the underwriters and insiders.

 After the open, the averages were remarkably flat today, TICK indications showed this very clearly.

Yields were also flat today, except without the gap up.

The 5, 10 and 30 year yields intraday today, just about as flat as stocks intraday. TLT is of some interest as recent updates have shown as we expected a pullback in TLT's August 26th post which we have seen, now it seems TLT may be preparing for a leg higher.


It almost seemed as if the $USD's legacy arbitrage correlation was at work in stocks...

$USDX (candlesticks) vs ES/SPX futures (purple), however the draft lower in commodities spoils that assumption, although there were some notable indications in gold and gold miners that need to be watched closely as we have been waiting for this pullback since July to re-enter a potential long term long trending trade.

Breadth on a new SPX and Dow high was horrible today, ironically I'm just seeing some of the major financial media outlets pay attention to the red flag we've been on for most of the year and especially recently as it has been almost able to call market moves on its own if you are looking in the right places.

For example...

"The Percentage of Stocks Above Their 200-day Moving Average" barely moved today, a mere 0.5% change (in terms of the percentage of stocks , not the daily change ). The breadth indicator, which is hard, factual numbers, not an interpretation, is now at 28 day lows after the lows of the July decline and August cycle's base from which it repaired for a bit by about +20%, it has now fallen to a level LOWER than the start of stage 2 mark -up for the August cycle on 8/11, yes breadth at a new high is lower than it was after coming off a deeply oversold decline,   rather than making a new high or at least a higher high.

Advance Decline lines are no better...

 The NASDAQ Composite's Advance/Decline line (green) led the Composite (red) through 2013 and in to 2014 before reverting to the massive average of all NASDAQ listed stocks, something big changed on July 1st as we were seeing in to the end of Q2 window dressing, it was only apparent a month or so later just how many things deteriorated the first day of Q3 or the end of the Q2 reporting period, including a massive decay of the NASDAQ Composite's Advance/Decline line which now has 47% of NASDAQ stocks in a bear market with losses of over 20%. 

The Russell 2000's Advance/Decline Line also failed around the same time and we have 40% of the Russell 2000 at a loss of -20% or more ( a technical bear market, sop  nearly half of the NASDAQ's stocks and 40% of the Russell 2000's are IN A BEAR MARKET NOW . This is just another reflection of that tall pier over the water that looks so nice walking on top, however look under the surface of the water and all pilings/support structures have rotted completely away, leaving the market exceptionally vulnerable to what I'd compare to a Pier crashing in to the water, not slowly dilapidating over time.

The Russell 3000 has the same kind of A/D line problems.

Interestingly today as stocks made a late day scramble to stay in the green, the Most Shorted Index actually declined!

 The Most Shorted Index was squeezed yesterday a.m,  these squeezes use to last for 2-3 weeks 4 months ago, now they last little more than an hour and in to today's action after meandering to the mean vs the SPX yesterday post F_O_M_C, Most Shorted Stocks seemed to be shorted as they declined vs the SPX (yellow vs green respectively).

 So what helped stocks other than JPY? The VIX vs the SPX (sSPX prices in green are inverted to show the correlation) was weaker earlier and slammed right at the time the market needed some upward momentum (seen here as down).

As far as who was in control of the market/correlation all day, look no further than HYG (blue).

 HYG vs SPX on a longer timeframe including all of the August cycle shows that it is negatively dislocated despite the recent support which should be put in perspective (the white area), the probabilities are near 100% that HYG continues lower. In fact, I suspect one of the reasons the VIX was slammed late in the afternoon besides the fact the Most Shorted Stocks were declining and unable to help, HYG is also deteriorating at a faster clip...

 HYG 3 min leading negative intraday, this is the first negative divegrence on the timeframe which is the one responsible for HYG's base and move to the upside.

However it went further than that and on the 5 min chart which is the first timeframe (fastest) that we see institutional activity intraday so it looks like they have done their job and are now backing out of HYG as predicted Friday.

ONE OF THE MOST NOTABLE SIGNALS TODAY WAS THE SKEW INDEX WHICH HAS JUMPED FROM 126 TO 142 (THE BRIGHT RED DANGER ZONE) IN A MERE 2 DAYS. 

THE CBOE SKEW INDEX (SAME PEOPLE WHO PUT OUT VIX) IS ALSO KMNOWN AS THE "BLACK SWAN INDEX", IT SHOWS OUT OF LINE, LARGER PREMIUMS BEING PAID TO COVER TAIL RISK OR IN OTHER WORDS, HIGHER PREMIUMS TO BUY DEPP OUT OF THE MONEY PUTS either hedging long exposure or expecting a rapid drop to much lower pricEs in which the puts would be of value as they are so far out of the money and a heavy premium is being paid for them, which is why the SKEW rises. Anything above 115 is the danger zone, but above 130 is extremely dangerous and a 16 point climb in 2-days  IS NEAR PANIC!

Tomorrow morning I'll post some more breadth charts and show you the comparison between them now and at the very top (SPX new high as well) of the 2007 market, you might be surprised how similar they look.

For now, let me finish with internals.

There was a Dominant Price/Volume Relationship, 20 of the Dow 30, 63 of the NASDAQ 100, a smaller ratio of 643 of the Russell 2000 but still dominant and 234 of the Russell 2000. Of the 4 possible combinations, today's Dominant P/V Relationship across the board was Price Up/Volume Down which is the most bearish of the 4 relationships and often sees a next day move lower or over the next couple of days.

Adding to that was 7 of 9 S&P sectors in the green with Financials leading with +.98$ and the Defensive Utilities lagging at -.72%.

Also adding to the near term 1-day overbought signal were the 239 Morningstar Industry/Sub-Industry groups with a whopping 190 of 239 finishing green, often an overbought signal we specially with the P/V relationship.

so why all of the fear all of the sudden in SKEW? Well if we are right about the head fake move in the market (Igloo with a chimney) that we are seeing now, then stage 4 decline is right around the corner as a head fake move is the best timing indication we have from price itself and with breadth as ugly as it is now at new highs, as bad as it was after an 8% decline in the Russell 2000, there's absolutely no support in the market, as already mentioned, nearly half of NASDAQ stocks are already in a bear market and 40% of the Russell 2000.

As for tomorrow, the Scottish vote which looks like it will fail should be a risk on event at least for Europe and in the US we have the Alibaba IPO pricing around $66-$68, recall what I said earlier about $8 billion in shares not covered under a lock-up covenant and to add to all of this, it's Quadruple Witching, not just options expiration.

I'll have those breadth charts out tomorrow, I think they need to be seen to really have a more complete perspective of this market. It's never different this time as you'll see when looking at the same charts from the absolute 2007 new SPX high or market top.