Today we saw two forces at work, in the early going we had the Wall Street Journal Article that seemed to put the brakes, not completely, but in a manner not consistent with the recent predictions by Goldman Sachs as to how QE2 may proceed. Remember, the market has already priced in a lot of high hopes regarding QE2 so that contributed to the early weakness in a big way. As I mentioned in one of the updates, it's likely that some of the gap will be filled as their will likely be some firms caught in the GS mentality with inventory priced at higher levels and that inventory can't be sold at a loss-so look for some gap filling as a possibility, depending on how many were caught off guard.
The second force was front running tomorrow's POMO by the Fed and what better place to front run it then at lows like we saw today. As I said with yesterday's Fed POMO operations, watch for changes of character in the POMO days-including tomorrows.
The Second Shoe?
I mentioned last night that the second shoe was likely to be dropped from the same source that dropped the first shoe, MBS (Mortgage Backed Securities), although this time for a completely different reason. Along those lines we have this story.
Investors in 2600 MBS deals are going to go in for the long haul fighting servicers according to Bloomberg. (click link for the article) Here are some of the highlights:
“Risky lending and the financial crisis that began in 2007 led to the highest number of foreclosures since the Great Depression.”
“This month, attorneys general in all 50 states began investigating foreclosure practices, and a bondholder group said to include BlackRock Inc. and the Federal Reserve Bank of New York asked Bank of America Corp. to repurchase mortgages, citing alleged servicing failures by the company’s Countrywide Financial Corp. unit as part of its strategy.”
“procedural hurdles and banks’ plans to fight a “war of attrition” mean that they may take as long as three years, he said.”
“About one-quarter to one-third of the mortgages packaged into bonds without government-backed guarantees before the market collapsed probably deserve to be repurchased under the terms of securities contracts”
“We found servicer defaults in 100 percent of the trusts”
In Market News...
AAPL Down in After Hours-
AAPL's 10k which was just released said they expect their gross margin to shrink to 36% in Q1 2011. In 2010 it was 39.4%, in 2009 it was 40.1%. Do you see a trend developing here-keep reading! AAPL also announced that it doesn't stop there, they expect further deterioration in the future. Considering, the question is, "was this leaked already?" meaning, "Is it priced in?". AAPL is known for running a pretty tight ship so it's a valid question. This is really important as AAPL's weight on the NASDAQ 100 is the highest of all 100 stocks, at least 19%. From my calculations, AAPL alone offsets the bottom 51 NASDAQ 100 stocks. In effect, those 51 stocks could decrease by 1 % and AAPL could increase by 1.01% and the NASDAQ 100/QQQQ would close in the green for the day if the index were made up of 52 stocks, that's how much weight AAPL has. This is why I said last night that the market itself, meaning a majority of stocks could be declining and by running up a few key stocks like AAPL and XOM, the indices can close up day after day while the actual count of the majority of stocks is down.
AAPL's hourly chart shows a negative divergence that explains the recent hold up/consolidation...
However, this does not tell us whether this news is priced in. The divergence doesn't look especially interesting so I'm guessing that it is not priced in. The two square are the areas in which 3C is measured relatively.
Turning to the Dollar
As 3C suggested, we are seeing strength in the dollar. When the divergence showed up, it was hard to make a logical case for a stronger dollar, as I always tell you though, these divergences occur and you find out the reasons later, such as the GLD negative divergence and yesterday's disclosure by PIMCO that they've severely reduced their gold exposure.
So the dollar has been gaining recently as you can see in this chart below:
As you can see the UUP (dollar proxy) added a day of follow through to yesterday's breakout today from the flag consolidation. Yesterday, intraday, I said “I'd like to see volume pick up”. As you can see in the white box, we did see an increase in volume today on a follow through day, this is bullish and it's something we HAVE NOT seen in recent darling stock gains. Bullish follow through in the market has been largely absent.
The worrisome part is the dollar's gain against the Yen, last time the Japanese government launched a surprise intervention to try to weaken the Yen to help exports. The BOJ (Bank of Japan) meets tomorrow and the dollar has recently gained on the Yen.
Note the recent gains in the dollar, this has to be a concern to the BOJ.
Another Week of Negative Fund Flows...
As I mentioned yesterday, the funds are flowing out of domestic funds and into bond funds. This week makes the 25th week in a row in which money has flowed out of funds, year to date, the outflow is $81 billion meaning the Fed and the market's attempt to pump the market and get funds flowing in (as most volume is simply HFT churned volume in which they derive income through rebates, spreads and their games that have nothing to do with price discovery) has been a total failure. You can thank Brian Sacks and the Fed's POMO for gains in the market-it's not coming from mutual funds, pensions or retail traders. This is again, probably one of the catalysts that has caused 3C to show massive distribution even into higher prices. At some point the music stops and there will be, as always- bag holders, although not as many as there would have been a year ago as so many retail investors have totally exited the market leaving pathetic volume which would be even worse without the HFT churning, leaving an environment in which it is exceptionally easy to manipulate just about anything-just think FLASH CRASH.
Tomorrow is a POMO day and as I told you several times today, we've had some longer term (5 min plus) positive divergences, this is apparently the front running effect of POMO. What happens after POMO ends at 11 a.m. will be the question and an interesting one at that.
Same for the SPY...
Looking at the longer term (because what we are seeing above is the 1 p.m. Positive divergence I mentioned today which is the result of High Frequency Firms and others front-running POMO tomorrow) which are less influenced by HFT front running/POMO are still showing distribution when looking at the bigger picture.
THE SPY 15 minute chart has shown negative divergences-selling into higher prices, but the recent action where the arrow goes nearly straight down, is showing exceptional recent weakness.
The DIA is showing nearly the same thing, on this layout I also have the extra-long 3C in blue at the bottom, it is looking really bad. These types of charts, being longer term, are more apt to show the underlying trend without the daily ups and downs or what I'd call noise that we so often get hung up on.
The QQQQ is showing virtually the same exact thing. This is just a piece of the puzzle. Consider this with last night's post that was largely focused on market breadth, the more pieces of the puzzle, the higher our probabilities are. Whether the market drops 2% tomorrow and follows through on a reversal or later, you know that if you buy this uptrend, you are not buying a healthy looking uptrend (I showed several examples last night of what healthy up-trends look like-these don't fit the bill).
GLD-Showing Interesting Activity Lately...
While I still think the medium term trend for GLD is going to be down, tomorrow we should see appreciation or a bounce in GLD. As I've stated many times, tops or bottoms are not “V” shaped, they are “U” shaped, or in other words they are a process, NOT an EVENT.
GLD's longer term trend....
As you can see, the first horizontal red arrow at the top was a negative divergence of some importance on the 60 minute chart, there's where the break occurred right after the divergence. Now Both the yellow and the long term blue 3C below are both in leading downside divergences so a day or a few days up here and there are merely part of the process.
Next zone of trouble for precious metals, lawsuits over Silver manipulation. JPM and HSBC are being sued for exactly that. We'll look at JPM in a minute.
With GLD looking as it does, I'd expect some kind of weakness in the dollar tomorrow.
Above we see UUP (the proxy for the dollar) showing a 5 min negative divergence today, so I'm expecting the dollar to lose some ground tomorrow, but this is as I say, “a tree in the forest”.
Above is FAZ, a 3x leveraged short ETF on financials. You can see the red arrow, a negative divergence or distribution led to a decline in FAZ at the August top. Recently I've been saying I like FAZ a lot at these price levels, I believe it to be a short term (maybe longer) bottom. Look at the white arrow on this hourly chart, it shows a positive divergence/accumulation. So if FAZ rises, that means financials decline and we have plenty of reason to see why financials could not only decline, but could be the second shoe dropping. If financials decline, the dollar should be up, so a day down, is again, “A tree in the forest”.
Also in the Financial area...
BAC, which I have been very bearish on is a great looking stock to short on weakness. So long as it does not violate the upper line my Trend Channel, I view it as a short that I'd build a position in on days of strength. Here's the current Trend Channel stop for BAC.
BAC should bounce tomorrow, you may want to consider starting or adding to a short position. So long as we don't get a close above the white arrow, the trend is still in effect. You can see the Trend Channel would have kept you short this trade since Q2 around $19.
JPM is another caught up in the mess that is “Fauxclosure Gate”.
As you can see, MACD has gone negatively divergent. It may trade within this rectangle, which may be a consolidation/bearish continuation pattern. I wouldn't make any serious commitments until it breaks below support, but shorting a little around the top of the rectangle may offer a high probability, low risk short trade entry.
More on the Broader Market...
Today the primary catalyst, as mentioned above, seems to have been the WSJ article suggesting that QE2 will not be anything like Goldman Sachs has been pumping it up to be. Numerous critics of “that type of QE2” and any other type of QE2 have become an increasingly vocal group with some heavy hitters; for example- this article in the NYT with the White House's own former economic advisor, Peter Orszag...
It's amazing that the market didn't take the Janet Yellen "Columbus Day speech" more seriously. She spelled it out almost two weeks ago, instead everyone decided to go with Goldman Sachs rosy, most likely self serving projections. She's the #2 at the Fed, her comments were not off the cuff and they were not spoken without Bernanke's knowledge and blessing. So today the WSJ let the cat out of the bag before the 1 week blackout from the Fed that is traditionally observed before an FOMC meeting. I've said for some time, I truly believe QE2 is not going to be anything like QE1. QE1 has succeeded in what way? It's done what Fed policy seems to always do, create bubbles in an attempt to break or repair damage from previous bubbles, thus my moniker for Bernake, Ben “Bubbles” Bernanke.
Other news today included Greece's budget breakdown-take a look around the web about that one, it threatens to throw Greece right back to where they were in the darker days. Square one and could effect the entire EU once again.
A Short Break...
I'll be taking a short “semi-break” on a cruise tomorrow, I'll be covering the market in the morning. I'll be gone Thursday afternoon and Friday and arrive home Monday morning. I'll be updating as much as possible while on my mini vacation-probably it will be end of day wrap ups like this one for Thursday night and Friday. Monday I'll be home. I'm going to add a bunch of trades to the trade list tonight, please set alerts.
If you don't have a real time alert system-try Telechart tabbed at the top (I can also share many of my indicators with you if you are using TeleChart) or if you want FREE REAL TIME charts, with alerts and no 20-minute exchange imposed delay (real real-time) with alerts, then try www.FreeStockCharts.com there are no catches, no fees, it's totally free. Most charting you find for free is 20 minute delayed, not this one. So I'll be watching the market and updating at night and as often as I can between my hops from Key West to Mexico. I won't drink the water. I hope the cruise ship doesn't take me to the cleaners for Internet access.
In the meantime, please...... set those alerts. We have a lot of great trade opportunities going off everyday. Don't get discouraged if your trade doesn't take off the first day, many of these are STAGE 2 or STAGE 4 trades, that's where the relatively easy money is and also where you will find the trends, so use risk management, take a little longer perspective as we can see, the day to day will kill you if you are not super nimble.
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