There's No Anticipating The News

Just Monday night, Obama and the Republicans seemed very close to a deal on taxes, which seems to have been expected and priced in. Had they not or if Congress fails to pas certain measures, the most dangerous for the market-the Capital Gains rate, then it would be very likely that many traders would be locking in gains from this year before options expiration sending the markets lower so last night seemed to be a good deal for the market and the market acted that way before the open with futures ramped up between half and one percent until the bond market realized that the deal would be adding a trillion dollars of debt in the next two years alone.

As I showed in my very first update, we had negative divergences across all timeframes right off the open, meaning the gap up was used to distribute shares, not rally the market higher.

Why is this? Take a look at what happened to bonds today. Despite the Feds massive QE bond buying, bonds were dumped today in a way we haven't seen in quite awhile. The reason? Deficit spending was front and center stage with all of the tax cuts and add ins of the proposed agreement. The 10-year bond's yield rose to levels not seen since June-this despite the Feds buying to keep rates subdued, their now higher then before the most QE began, well higher then QE2 levels, that's how intense the selling was. The move in treasuries sent the dollar higher, a higher dollar leads to lower asset prices.

As I'm writing this, the Asian markets are mixed, Japan is getting a boost from the stronger dollar, weaker yen which makes Japanese exports more competitive. Other Asian countries are booking profits and are sliding on fears of uncertainty.

In the US, the higher bond yields, especially on the 10-year which determines mortgage rates is causing higher rates in an already soft real estate market, remember that SRS is on the long list of trades, (an inverse ETF or short on real estate). The saying is “Don't fight the Fed”, while the war may not be over, today they lost the battle with the Fed getting spanked hard with rates higher, remember QE was supposed to keep rates low.

All that said, the divergences seen today across many timeframes, all really didn't just develop today, there's a bigger back story going on as this distribution has been going on for some time. One factor may be funds are not willing to gamble right now with gains, they may be trying to lock them in, today's gap sell-off on negative divergences surely illustrated some degree of that line of thought.

Here's what the charts look like as of tonight for the SPY.

 1 min- strong negative divergence right off the open. 6 months ago I use to list a lost even most of the trades list as market orders, buy on the open the next morning because a gap up almost always ended with a close at the high of the day, today's market could not have been more different.

 5 min has flowed into all the longer charts with distribution evident very early on in the bounce , we're near bounce highs, yet 3C is at pre-bounce lows. That's a lot of distribution very quickly.

 The 15 minute chart being in this big of a negative leading divergence (in the red box and the worst kind of divergence) is saying a lot about the underlying tone of the market.

 Even worse, the 30 minute above and 60 min below are also now in leading negative divergences.

Finally the most serious, the daily chart. While it's hard to look at the market and think about the consequences of these charts when the market has been moving higher, I can't ignore them. 

We'll see how tomorrow goes, but I'll be updating many of the trades to reflect better positioning.