Columbus Day / Erste Bank

I found this little tidbit interesting. Since 1980, Columbus Day, known for low volume as the Bond market is closed, has closed up 21 days and down 7 days a 3:1 average. Columbus Day 2008 the market closed up 11.58%.

As for Erste, unless you are European, you probably have not heard of the huge Austrian bank, however having travelled to Europe many times and being married to a Hungarian, in my very own wallet as I noticed Saturday when looking for my PetsMart Card, I have an Erste bank card.

As of the time of the European banking stress tests, ERSTE claimed no exposure to CDS, which was an accounting gimmick as they were not held in a trading account, which is what the stress tests looked for, but rather held as "Credit Surrogates".

Today the huge Austrian bank came clean and admitted to losses in their Hungarian and Romanian portfolios that would lead to a 14% loss of book value, something exacerbated by the housing situation in both countries which gets pretty complicated but has to do with Swiss Franc mortgage transactions, something Hungary is currently being scrutinized for.

ERSTE announced today that their CDS portfolio of $5.2 billion EUR ($2.4 bb related to financials and $2.8bb related to sovereign exposure) is taking a major hit-something previously unknown or declared in the banking stress tests.

This alone may be an ugly event for the bank, the wider implications are "Why was it not disclosed during the stress tests?" and even more frightening, "How many other banks did the very same?" and "How Much?" in essence, this is something that has been suspected for sometime, however this is the first confirmation from an actual bank. Now these banks will likely be forced to mark their CDS portfolios to market, taking a major hit in the process as CDS spreads have spread like wild fire. In essence, a CDS is insurance, the bank writing it (ERSTE) is betting their will be no default, the bank or sovereigns buying CDS are buying insurance, so you can see as PIIGS and now other countries like Romania and Hungary start down the path to default, the losses will build for these banks that wrote CDS and when they are forced to mark their CDS to market, the losses will be overnight and quite large.

To what degree this changes the banking sector risk throughout Europe is a total unknown, ERSTE is the first to declare it, however certainly not the last.

While I have described Slovakia as a wild card today, it seems there is a new and perhaps more ominous wild card taking shape in Europe and one in which the EU is probably not aware of. In other words, a whole new bogey man just reared its head in the EU.

Final Market Update-

 IWM 1

 IWM 2

 IWM 5

 IWM 10

 IWM 15

 IWM 30

 QQQ 1 -some damage today

 QQQ 2

 QQQ 5 some more damage today

 QQQ 10 lots of damage here

 QQQ 15, some damage on the 15

 QQQ 30-damage today on the 30

 SPY 1 damage today

 SPY 2

 SPY 5 min -damage today

 SPY 10

SPY 15

There's been some damage in the later half of the day that is bigger then I'd expect.

Dow-30 vs Dow-20 Transports

These are the actual averages, not the ETFs.

 Dow 30 1 min

 D-30 5 min

 D-30 10 min-big move for a day

 D-30 15 min, another big move for 1 day

 Dow-20/Transports 1 min

 D-20 10 min, another big 1 day move

 D-20 15 min one of the worst looking 15 min charts.

D-20 30 min at a relative negative divergence.

This is part of the reason I am willing to hold part of my short position, I just don't want too much exposure at such a pivotal point as I mentioned Friday.

DIA, IWM, QQQ join the SPY

 DIA breaks today's range

 IWM

QQQ

SPY just broke the range to the downside

I had a feeling this might happen after seeing the upside breakout fail. If you day trade this on the short side, make sure you are Regulation T compliant.

NASDA 100 Advance/Decline Ratio

 a 5 min A/D ratio for the nASDAQ 100 components.

15 min chart

Market...

Over the weekend, it was Germany/France meeting who agreed in principle to expanding the EFSF in principle, but said details would be up to a month before they came out. Today, Slovakia could derail the entire process, although I am more apt to bet with the corruption of politicians then them doing what is right for their country, over the weekend, Germany/France were the wild card, this week, Slovakia.

 SPY 1 min

 SPY 2 min

 SPY 5 min

SPY 15 min.

Remember the original plan was this-the market makes a new low and there's longer term evidence to suggest it will make a higher high, quite a bit higher as the 15 min chart didn't break down last week and hasn't now, that is why I kept my shorts "Not too aggressive", more looking for an oversold pullback.

Here's what the longer term idea looks like...

New low which we saw at the red arrow and then a move up, possibly this move would make a new high according to longer term charts, but the market was very overbought last week and showing signs of a tradable pullback, I kept my positions rather small because of the uncertainty around the German/French meeting over the weekend, which went better then anticipated and lifted the Euro 350 basis points, a recent multi year record.

Slovakia now stands in the way as they could derail the entire process, or could be using last minute tactics to extract, who knows what?

 VXX which trades opposite of the market is showing short term signs it wants to rally, meaning it would put downward pressure on the market. 1 min

 VXX 2 min

 VXX 5 min

 TLT -Treasuries 20+ year are a flight to safety trade, they trade opposite the market as well, so if the market goes down, treasuries generally go up and they are showing signs of wanting to move higher, suggesting there may be a flight to safety on market weakness. 1 min.

 TLT 2 min

 TLT 5 min

 TLT 10 min

 TLT 15 min-about the area where there's still strength in the SPY.

TLT 30 min is in line, so VXX is suggesting a short term slide in the market and TLT is suggesting that there is a flight to safety trade being put together. How or if anyone can know what Slovakia will do is beyond me.

The Euro has pulled back a little on this latest wildcard.

But the larger view of the Euro so far this week, fits with the larger view we have had of the market, the question is 1) pullback from overbought and uncertainty? 2) Whether this is the larger rally we have been talking about for 3-4 weeks now and how it plays out.

The market too is in the same zone of uncertainty, rallying on the German/French news, but rangebound on the Slovakian indecision.

This is why I'd rather have my portfolio closer to flat, I don't know whether the market can accurately assess the deliberations of a sovereign nation that has so far not supported the expanded bailout mechanism, but also hasn't said no. They have about a day to decide-tomorrow.

This is why I would like to use any downside weakness that may develop today to reduce exposure to the market, at least on a short term basis.

There are a lot of other charts too, I continue to go through them looking for any hints that the Slovakian decision is in any way known, so far it doesn't look like it, but I am VERY concerned about their susceptibility to bribes being one of the poorest of the European or EU members.

FX-EUR/USD

SPY trading range-possible head fake, this also gives you another stop that can be used at the white line.

 FXE/Euro 1 min deterioration

 FXE 2 min

 FXE 5 min

 UUP 2 mn

 UUP 5 min

UUP 10 min

These charts, plus the other proprietary signal seem like the Euro is facing headwinds and the dollar should gain, which is equity negative.

My personal plan is to try to use any downside weakness to short in to and reduce my total exposure to the market. Slovakia is a total wild card and the more I think about it, the more I think they are susceptible to bribes, and "other" tactics, I don't want to be too heavily weighted in either direction come their second meeting tomorrow which is the 11th hour for the decision.

So be mindful of Reg. T if you are not Reg T compliant, but my plan is to get as close to flat as possible today, as of now unless we see other developments.