NYSE Short Interest

Here are the latest short interest figures from the NYSE. Mid September Short Interest hit the highest level sine March of 2009, which was also the market bottom and the start of a 2+ year bear market rally. The latest reading saw Short Interest drop over 5% in a flat market more or less. The S&P last week put in its strongest rally in over 2 years, it will be interesting to see the October 15th short interest levels. Note the low volume of the rally, this is a classic short squeeze environment and the lack of pullback is classic short squeeze price action. This was the point of the market making a new low before heading off on what I said would be the biggest rally we have seen in awhile, although I'm even surprised by the intensity of the last 9 days.  If there's one lesson I've learned the hard way, it's that when the market starts acting like this, there's a pendulum effect and as irrational as it moves in one direction, watch out, it will do the same in the other direction-that's the kind of volatility of a wounded, dying wild animal and usually portends a big change.

A Very Interesting Article

I think ZeroHedge is a site with an ability to bring an unparalleled amount of information to sophisticated investors, far more then CNBC or other finance media outlets that break everything down (as far as what the market did) to 1 sentence explanations. I think they are right on with much of their data, which is ALWAYS bearish, but have such a bearish bias that they miss the opportunity to bring bullish data that can be used, even though we are in what I would call a long and short term bear market rally mode.

In any case, this article which is actually from Deutsche Bank, is very good and shows just how complicated the market truly is, how many interconnections there are and how the 1 sentence explanations are so much easier to swallow, but are the furtherest thing from the truth. Just imagine the typical CNBC Fast Money or Mad Money viewer try to grapple with understanding this article. I like to keep it simple, but I also won't bury my head in the sand when confronted with the complexities f the market, nor will  shy away from bringing you information from a site that I believe to be a little too biased, because sometimes it simply comes down a very simple statement, "Truth is true" no matter where you find it and this rings of truth. I will highlight in red and underline some things I think are important or agree strongly with. Here's the article and link to the full article.

The Biggest Market Headfake Ever: Is A Wholesale French Bank Liquidity Run The Sole Reason For The Euro, And S&P, Surge?

Over the past two weeks, there is one simple thing that has been bugging skeptical macro observers: namely the paradox of i) just how ugly the European funding and liquidity situations have gotten, on the one hand, confirmed by the blow out in French bond yields (the French-Bund 10 year spread just hit an all time record yesterday) as well as continuing deterioration in credit spreads across core European nations, yet, on the other, ii) the euro, especially in that critical pair the EURUSD, has seen one of its most explosive rises in recent history, which as Zero Hedge pointed out yesterday, has totally decorrelated with the French-Bund spread, to which it had been firmly 'pegged' previously. As a result of ii), equity markets have surged due to legacy correlation arbs, which see Euro strength, and hence dollar weakness, as an empirical signal of equity "cheapness", which in turn leads all algos to treat a rise in the EURUSD as a buying signal. So how is it that even with the interbank liquidity situation in Europe frozen and getting worse, further keeping in mind that European banks are now expected to (or have already commenced - see yesterday's move in PrimeX) engage in widespread asset liquidations, that broad market risk is perceived as cheap? Simple. As the following note by Deutsche Bank's Alan Ruskin explains, the sole reason for the EUR (and hence S&P and global 100% correlated equity risk) surge in the past 9 days is not driven by any latent "optimism" that Europe will fix itself, but simply due to the previously discussed wholesale asset liquidations (as none other than the FT already noted), which on the margin are explicitly EUR positive due to FX repatriation, courtesy of the post-sale conversion of USDs to EURs. Which means that the ever so gullible equity market has just experienced one of the biggest headfakes in history, and has misinterpreted a pervasive European, though mostly French, scramble to procure liquidity at any cost by dumping various USD-denominated assets, as a risk on signal!

In other words, an internal bank run has somehow been interpreted to be stock positive... And there is your explanation for not only the paradoxical surge in the EURUSD and S&P, but why the correlation between the EURUSD and the Bund-France spread has completely broken down. Expect all of this to promptly, and very violently, correct once the market understand what an idiot it has been in the past two weeks.

The article continues and you an see the rest at the link above, but that's the synopsis.

Continuous Commodity Index vs The Market

As Mark Twain said, History doesn't repeat, but it rhythms. Large Technical patterns occur over and over again over hundreds of years of charting because human nature doesn't change. However if you have the book  "Technical Analysis of Stock Trends" by Edwards and McGee, considered to be the bible of T.A., it's interesting to see how things have changed by looking at the old chart patterns from decades ago as this is an old book.

What you will generally find is that the large patterns caused by unchanging human emotions, still appear, it's just small, short term manipulations by Wall Street are now present most of the time as Wall Street knows how to through off Technical Traders.

Lets take a look at the Continuous Commodity Index, which looked like a Macro version of the market.

 This pattern in the CCI is bigger and across more time, but psychologically is the same pattern as what we see in the market now. Below is the SPY for comparison. The only difference is the CCI collapsed already.

We see the same major events, a market top, some stabilization of the fall from the top and a consolidation in a parallelogram. At the end of the pattern there's a breakout of the pattern-this is Wall Street's game and you won't see it in the much older charts found in the book I mentioned above. From there, a nasty sell-off, which as I have said this week, I believe we are heading for a move to the downside much nastier then I originally thought.

 3C wise, there are similarities as well. First the break from the top at a negative divergence, then a low stabilizes on a relative positive divergence and this large consolidation pattern forms. Between late July and early August, there's a relative positive divergence (as I explained Friday about the SPY 15 min chart, I think this last rally is an accruement of accumulation from the entire pattern and the CCI puts in its biggest rally, which breaks the trendline to the upside (this is the Wall Street head fake that you don't find on older charts, simply because Technical Analysis didn't go mainstream until the late 90's and early 2000 so Wall Street found ways to throw traders off patterns they had been following for decades, even a century or longer). From the false breakout, 3C daily made a lower low on a relative basis and CCI plunged.

All of the same ingredients are here on the SPY chart (which is usually orange, but the original 3C was the yellow version, I only created the other two to deal with intraday trade which the yellow version wasn't very good at, but for those of you using 3C, for daily charts, the yellow version has been the most accurate). We see the same plunge from the market top, a 3C relative positive divergence that stopped the fall and created the consolidation, accrued accumulation through the pattern so there is a positive divergence at the start of this rally and the strongest rally in the price pattern, which also creates a head fake move above resistance in to a relative negative divergence.

The CCI Looks like this currently...

It is now testing resistance, but from the equivalent spot in the SPY right now, it took a nearly -15% fall.  So you get an idea for comparison, the last rally (which was the strongest-like the SPY/Market now) was 7%. The SPY's recent rally is double that at 14%, so if we stick with the relative comparison, that would imply a move of -28% down on the next leg.

Hide it, by Releasing it Friday Night.

Any good political operative knows that if you have to release a story, but want it not to be seen, you release it Friday night, which is exactly what the US Treasury as well as Canadian and Australian Finance ministers did late Friday in telling the Europeans that they were opposed to expanding the IMF bailout fund. Rough translation: Europe's problems are Europe's.

G-20 sources said the BRIC countries are open to the idea, however, China just spent billions this week bailing out its own banking sector, not sure they'll be of much help.

In other news the French Finance minister speaking about private Greek bondholder haircuts, up to now supposedly capped at a 21% voluntary loss, in his words, will be "More, that's more or less certain". There is talk that Greek bondholders could take up to 50% losses, but anything above 21%, even 21.0001% is no longer considered "voluntary" be the rating's agencies, which triggers a credit event and CDS (insurance policies against default that banks have been selling and are the latest subject of banking sector problems) kick in, which will cause a multi billion dollar collapse in the banking sector, mostly in Europe. You may remember the news article I brought you this week about Austria's biggest bank, ERSTE, having hid billions of dollars of CDS they had written in the European banking stress tests and will cost the bank 14% of book value right off the bat when forced to mark the CDS to market. This created a bigger panic in questioning how many other banks did the same and what the real amount of undisclosed CDS positions are. When those are forced to be marked to market, the banks will take huge losses, should a credit event be triggered, I'm not sure there's enough money in even an expanded EFSF and IMF combined to hold back the flood waters. This is akin to the next housing bubble, but this time it won't be 2 Wall Street banks that cause a near financial system collapse, but perhaps hundreds of banks.

Friday nights are alright for lying...