Daily Wrap

So we start tonight off with confirmation of what I've been saying commodities have been telegraphing and all of the sudden, China's move to cut the RR ratio for banks is seen in a whole new light.

Chinese PMI comes in at 47.7 on consensus of 49. A number below 50 represents contraction and this would happen to be the biggest contraction in 32 months. What started out as a knee jerk response to China's policy cut has turned in to confirmation of not only problems in housing, but their manufacturing base as well; certainly this is partly contagion from Europe, their biggest trading partner. Just about everything in the report was weak, New Orders, New Export Orders fell and inventories rose a lot.

Corning, a big player in the LCD TV market came out earlier today with a release that hinted that Black Friday was such a success because retailers and producers were selling at a loss, with inventories up so much in China, it's not hard to believe.

Also making the rounds tonight, Golman cut EU GDP forecasts from .1 to -.8 which equals recession.  As a reminder, S&P ratings said that would be enough to downgrade France, praise to Egan Jones who downgraded France today, as usual they are ahead of their peers.

The Mid-East conflict also escalated late today with a Chinese professor with the National Defense University saying, "China will not hesitate to protect Iran with a 3rd World War".

I knew the situations from the EU to China to the Mid-East would escalate fast, but I never envisioned this.

ES is vacillating between a point and two points down.

 However we have a new leading negative low in 3C.

The Context Model continues to leak lower.

Here are a few interesting charts I picked out tonight.

 First we have my Demark inspired indicator giving the first 60 min sell signal that we have seen in quite some time.


 MoneyStream is a powerful indicator, it gives few signals, but when it does, they are solid. Here are the negative divergences in MoneyStream - above is the DIA

 Here's the QQQ

 The S&P-500

 The SPY and I don't know where the chart disappeared to, but the entire NASDAQ Composite as well.

 Here's a negative 5 min RSI on the ramp close, which I have a feeling is a bull trap, we'll see.

Even though 5 min is enough time, I gave it the benefit of the doubt and it was there on 1 min too.

Here is the real stunner though.

Volume Analysis is becoming a lost art form, but an important one. The rule is stocks need advancing volume for a healthy rally, but stocks can fall of their own weight, volume is never a prerequisite for a decline and a bear market hallmark is in fact low volume. The only caveat to that rule has been when F_E_D intervention by pumping billions of Primary Dealer dollars in the market, kept it afloat during QE periods, however that is over and recent events make QE3 more difficult to pull off, not to mention the F_E_D members are openly disagreeing with each other in same day speeches on the policy tool's effectiveness which other then the "wealth effect" of higher stocks, has been about ZERO, GDP has declined from its peak, unemployment is persistently stubborn, and just about any other metric you choose has shown it can do 2 things effectively, ramp the market and ramp inflation.

 Here's a long term view of a healthy rally on increasing volume, note when volume dries up, the market pulls back or tops.

 So along that theme, today I put up my cumulative volume indicator which simply adds yesterday's volume to today's and creates a cumulative line, I was using it to look at some price patterns to try to see if they were random or real when I stumbled on this. The S&P-500 over the last 3 days of rally has seen the LOWEST VOLUME in more then a year. That's right, out big price gain came on extraordinarily low volume, you can see the blue cumulator of volume at new lows as well as a 2-day average of volume in white.

 In fact, it's the lowest since a minor top, similar to this week, way back in early 2009, the 2 day average of volume goes back to 2009 as well for lowest volume.

 It wasn't just the s&P though, the NASDAQ 100, also lowest volume since 2009.

 The entire NASDAQ Composite-every stock trading on the NASDAQ network!

And the Dow 30 has had a couple of lower days, both at tops.

So today? Sugar rush, knee jerk response or the start of a strong rally? You know where  come down on the issue.

Here's a snapshot of US futures as of 11 p.m.

Pretty darn flat thus far

We'll see what the 3 a.m. EU open brings.

Quick ES Update

I'm still gathering charts for my end of day wrap, it will be worth the wait and my time, but for now, I want to show you ES, remember what I said about the late day ramp in the market.

 Being I can only access our Risk/Credit indicators during market hour, I will use the broader, less specific CONTEXT model for after hours.  The model has leaked lower as I suspected would happen after the late day ramp, which I believe was there for one very manipulative reason, it wasn't on news. In any case, the model is diverging in afterhours.

Here's ES trade on a 1 min 3C chart from pre market to present. Note how the negative divergence in the early hours of the morning kept ES lateral throughout the day, a pretty linear trading range, no additional gains except the very end of day. ES is now about a point lower then the New York Close and as  suspected, right after the close, 3C went divergent again and ES has dropped as I mentioned, a point off the close.

I may set my alarm at 3 a.m. to see what happens, but thus far the market' inability to add to the gains sets up a loss of momentum and that will be addressed in my larger post later tonight. I've discovered a few things that will truly surprise you.

Today's Event of the Day

As you probably know by now, last night China lowered their banking sector RR ratios, this only a few months after tightening due to inflationary pressures that were causing riots in China. It is or was assumed that this was in reaction to the meltdown in Chinese real estate, however at 8 a.m. EDT, a Globally coordinated Central Bank intervention was announced with F_E_D, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank all taking part.

The FED is loaning directly to the ECB so presumably there is no counter-party risk, however with the F_E_D's discount rate at 75 basis points and the swap line which was reduced today from 100 basis points to 50 basis points, add the OIS (Overnight Indexed Swap, which is an overnight rate calculated based on an index- which generally speaking is cheaper and less risky then the interbank lending rate known as LIBOR which is the rate banks charge each other for overnight loans) means that it is cheaper for European banks to borrow from the F_E_D then it is for US banks- by approximately 15 basis points, an odd detail.

Of course the whole purpose of the policy action taken today was to make bank borrowing in the EU cheaper as they face what we have been talking about for some time, a liquidity squeeze as the same dynamics from the US in 2008 replay, interbank lending has completely frozen in the EU due to 'counter-party risk” or the risk of lending to a bank and having that bank go belly up or not be able to repay the loans. The key words to the coordinated policy action today are simple, "liquidity freeze" and "EU Bank Borrowing Costs' and this is a big problem. If a mere 50 basis point reduction was so needed, there must be real problems within the EU Financial sector. As we have already talked about, Italian banks are not immediately allowing withdrawals by customers of over $2,000 Euros. Instead an order had to be placed by the customer and the bank would notify them when the money was available.  This was curious, but we uncovered the reason a few days later. Italian banks are so locked out of liquidity markets that they resorted to a VERY odd solution-they are borrowing directly from the London Stock Exchange, which is using traders funds to supply Italian banks with the money needed at a premium on 3 day loans. Thus the reason for the wait, as the London Stock Exchange is deriving something like 15% of their income from these transactions, obviously the Italian banks do not want to borrow any more money then they absolutely need, it's somewhat akin to "Just in time inventory management".

It should be understood that the F_E_D is not bailing out Europe through the new swap line agreements, but they are trying to reduce the stress on the highly leveraged EU banks ( as mentioned before, unlike the US, they are leveraged 26:1 making a 4% decline a total wipeout of equity-a major concern). It's also important to understand this is not sovereign lending, it's making borrowing for banks cheaper as they already face hurdles in raising their capital base as the EU has demanded-remember how many US dollar denominated assets the EU banks have liquidated which supported the Euro as dollars were sold and Euros were bought to repatriate the capital. The sales were obvious in the Primex market offered by Markit as well as USTs and most likely US equities and fund redemptions. 

Further evidence of this was released today by ICI (Investment Company Institute).  Domestic Equity Funds just saw another $3.8 billion dollars pulled from Funds and thus the market. This is the 14th consecutive weekly outflow (totaling $44 Billion) and the timing is about right as compared to the EU banks ordered to recapitalize, which means that they need to raise just about the same amount as their combined market cap. As we talked about, they refuse to issue shares to raise money as they are trading below book value, instead they have opted to sell everything not nailed down and it wouldn't surprise me at all if some of these outflows from domestic funds were being repatriated directly to EU financial institutions. The consecutive outflows would actually be 31 weeks if it weren't for 1 week of inflows of less then a billion dollars, the total for 31 weeks is $130 billion dollars.

While this tid-bit is slightly off topic, it does show the power of the F_E_D's QE program to levitate the market as well as inflation. Since 2010, the market has lost $214 billion from Equity Funds, yet the market climbed higher due to the arrangement between the F_E_D and the Primary dealers which were flipping bonds to the F_E_D (in some cases only holding them for a week) and in return earning billions of risk free money that was put to work in the market, mostly in the most heavily weighted stocks. Note what the market looked like (a top) at the end of QE 1 and note what the market looks like now (a top) after the expiration of QE2. Here's flow chart of funds incoming or outgoing vs market performance.

Note that while money was flowing out in 2010 during QE2, the market kept rising. Look at what happened after QE2 ended with outflows, the market dropped considerably. The October outflows were substantial compared to the median and this is around the time the EU banks were selling everything.

I digress...

While the break-up of the EU may seem far-fetched, Germany has certainly been making movements that could be construed in many different ways, almost all would either disband the EU or cause the EU to fail. In the F_E_D's new agreement, which is posted at the New York F_E_D website, there is no mention of who would be responsible to repay funds in the case of an EU breakup, something I'm sure Ron Paul would like to ask Bernakacide.

The statement by the F_E_D added the following:

U.S. financial institutions currently do not face difficulty obtaining liquidity" but if conditions deteriorate the Fed has tools which they "are prepared to use,"

Today it seems this has been widely interpreted as Too Big to Fail banks such as Bank of America, could be rescued if need be, but it is more appropriate to read the statement in the following manner, “ If US banks face a liquidity crunch, the discount rate could be lowered from 75 basis points. If financials saw any strength from the initial interpretation, they would most likely be very mistaken as the F_E_D would be very unlikely to address bank failures at this time and within the context of the policy action. Still it is strange that EU banks can borrow from the F_E_D cheaper then US banks. This must speak to the financial conditions in the EU being a lot worse then is currently thought.

It would also be important to consider that the F_E_D may be charging a slight premium as US banks can borrow directly from the F_E_D's discount window which carries some degree of risk, whereas EU borrowing is by the ECB, less risky then an individual bank.

One of the strangest features in the policy action is the framework set up, but not activated, that would allow US banks to borrow Euros, Yen, Loonies, Pounds and Swiss Francs directly from the F_E_D. Policy changes by the F_E_D are not arbitrary and this curious feature was put in place for a purpose in which they could be activated in the future, the question is why?

In the NY F_E_D's FAQS here is what they have to say:

Why is the Federal Reserve establishing lines for these five currencies and with these five central banks?

These five currencies are used globally and account for the bulk of the foreign currency funding of U.S. financial institutions.

This is curious and a bit alarming.

Today's reaction certainly seemed to be a knee jerk reaction and we saw many indications of that. Just as a reminder, here's a chart I posted earlier today which depicts the last time there was a globally coordinated central bank intervention...

More coming, I've uncovered some interesting charts sniffing around today.

CREDIT/RISK Indicators

These are all zoomed so you can see today's action, in earlier posts you can see that many or most are much lower then the market and thus already dislocated, the end of day rally is interesting with these indicators.

 Here's one of the most interesting charts especially at the EOD ramp, credit went the exact opposite direction as the S&P ramped in to the close, which I usually suspect is to cement longs in place and get retail that comes home from work to enter long orders and thus becomes a set up. If there was some real risk on reason for the ramp, credit would have moved up, at bare minimum stayed flat, but not move to the lows of the range.

 You can see just how disconnected and emotional the market is today by looking at the normally near perfect correlation between the EUR/USD, the Euro should be the one rallying after today's announcement, instead it leaked lower all day and at the EOD ramp.

 Rates, same story.

 Financials did see good momentum toward the EOD and that may be because they are the most obvious short target as today's operation was not a EU fix, but a helping hand to banks in reducing the rate of interest they pay to borrow capital.

 Commodities which have been outperforming recently and which should be the beneficiary of today's policy intervention actually showed the worst crack all week, look at the difference in the afternoon trade, that's a divergence.

And that now put's commods in a dislocation.

Closing Update

I'll try to pull up the risk/credit charts too if I have time. Also if I have time, I'll probably add to at least 1 financial short, this is because of time restraints as the MP is my last priority. I'd also like to look at breadth, but that will have to wait until later.

 DIA 1 min, zoomed in, just nothing positive going on there today, a slight positive divergence toward the EOD, the first of the day which is typical on a late day ramp for a day like this, hopefully I can add in time.

 The 5 min chart is just a disaster, no attempt to even get close to confirmation, this looks like  VERY weak underlying trade.

 The 10 min which I don't have on stockfinder, only TC with a limited historical view, but still the fact 3C can't move up beyond yesterday's highs on a 3.5% move and the fact it has been stair-stepping lower all day.

 IWM 2 min, didn't even move past this week's highs at much lower prices. This is obviously leading negative.

 The 5 min chart didn't move wither, it should be where the blue arrow is at least.

 The 10 min againcan't move above yesterday's highs, very weak.

 The 15 min just stair stepping lower.

 QQQ 1 min zoomed in shows a few positive divergences

 You can see how far out of line it is though on this zoomed out chart.

 The 5 min couldn't make a new high or and is leading lower.

 Same with the 15 min.

 SPY 1 min, speaks for itself.

 The 2 min is even worse moving lower.

 Zoomed 2 min with a slight positive EOD divergence.

 The 5 min couldn't move above anything this week at much lower prices.

 Zoomed in it is lower all day with a slight positive toward the EOD.

And the 10 min moving lower all day.

Looks to me like short selling.

Ron Paul on the F_E_D

Here's Ron Paul's statement about what happened today, we should be so lucky as to have this man in the highest office, although I won't hold my breath.

Statement 

Just Saw this

I have my eyes glues to charts and have missed some news that shouldn't be missed. The rating agency Egan Jones, which seems to be the only one ahead of the curve, downgraded France today from AA- to A Negative Watch citing debt vs GDP rising by nearly 20% by 2013.

It was bound to happen, lets see if the other rating agencies take the clue.

The F_E_D Cancels First POMO EVER

I was sent this news from a member as I have had my nose in the chart all day, but the F_E_D did cancel the first POMO ever in the history of POMOs, which was scheduled for a $8 billion dollar sale of 2013 bonds. The reason given, technical glitch!

What is probably more accurate, considering the timing of China's move and the Global banking cartel (none of which seems coincidental to me)  and this historical precedent of the cancellation of the operation today is this, the operation (POMO) is a liquidity soaking operation, meaning it reduces liquidity which is EXACTLY the opposite of their 8 a.m. move to increase liquidity. So now they are cancelling an $8 billion dollar POMO that would reduce liquidity at the very same time as they introduce a globally coordinated liquidity boosting operation.

So the obvious question that the market should be starting to come to terms with after the knee jerk reaction is, "Just how bad is the liquidity situation?"

I think we got the answer to that question a week or so ago when it was uncovered that Italian banks are borrowing money not from the normal channels, but from a highly unlikely source, the London Stock Exchange!

As the F_E_D said in their FAQS about the operation liquidity that they unleashed today, the weekly NY_F_E_D report will show who borrowed exactly what. This was the problem we saw in 2008 when banks didn't want to borrow from the f_E_D's discount window, it gave traders a heads up on who was weak and they went after those banks, that's why the F_E_D created an opaque lending facility so there would be no stigma for the banks, this time around it's a bit different, which makes me wonder exactly what will happen when the first report is issued and the shorts pile up on any bank that tapped the borrowing facility? They definitely have to weigh the pros and cons of borrowing the money and those that decide to take the money, may very well see their share prices plummet.

3C/ES Update

After this post I'm going to answer a few emails and am switching templates, but I thought you should see the ES chart.

Leading negative. As the 3C template loads back up I'll look to confirm in the averages.

Credit/Risk Basket

Last night I worked on creating an oscillator that would better display dislocations, it is a step in the right direction, but still has a flaw as I had to use the rate of change between the risk asset and S&P to create the oscillator function, the problem that I still have to overcome will be evident in a chart below.

By the way, the CONTEXT model is leaking lower then ES which kind of confirms at least some of what we saw earlier in commodities and what we will see in this update.

 First the hourly chart and the oscillator below, this is commodities, dislocations between a risk asset like commodities and the S&P which theoretically should move together in a "Risk on trade" provide good entries it seems as you can see, shortly after the dislocation, the S&P in green tends to fall. The oscillator being above the zero line signals a dislocation which you can also usually see in the upper price window when comparing the performance of the two assets being compared. The closer the oscillator is to zero, the more in sync the two asset classes are performing. On a 60 min basis, I was surprised to see the recent commodity strength still is underperforming the S&P and thus providing a dislocation, I'll keep that in mind if I enter FCX short.

 Intraday commodities are leaking lower then the S&P, this is no surprise considering the retracements of 60+% in commodities, Copper and Crude that I posted earlier.

 60 min High Yield shows the dislocations pretty well and this is what I was hoping to see on a bounce to add to shorts. Note each dislocation in red is followed by a drop in the S&P. Theoretically this is because in a risk on rally, all risk assets should move together, when credit fails to confirm a risk rally as a risk asset, then there's a problem with the rally, most often recently these dislocations have occurred on knee jerk reactions to sugar rush news items in which credit (the less emotional ) is not impressed and refuses to rally with equities (the more emotional).

 Several dislocations in High Yield including today, but I put this chart to show you that credit has not broken above the highs of 6-7 days ago while the S&P has, it's just a way to show you the relative performance of the two assets.

 The Euro which has a strong correlation with the market of about 1.0 meaning nearly identical, shows a massive dislocation right now, even though it is rallying, just not to the extent of the implied/historical correlation.

 Intraday, the Euro first outperformed the market and now is underperforming. Remember the average correlation between the Eur/USD 1 pip move is 2 DOW points, so looking at the hourly chart, I probably should figure out what the implied fair value of the DOW would be as that is the potential target on the downside assuming the market doesn't overshoot and assuming the Euro didn't leak lower.

 High Yield Corporate Credit has been the stronger of the risk assets, there are several dislocations as you can see on the hourly including one now, each of these has led to a move lower in the S&P.

 On an intraday basis, the dislocation between HYCC is not as obvious as it is on the hourly chart.

 Here's the Financial momentum indicator which was mostly in line with the October rally, but near the top started to dislocate badly, which eventually led to the drop, even with the market blasting higher this week/today, the momentum indicator is very weak and at new lows below the October market lows for 2011.

 Here's the intraday Financial momentum indicator, it is certainly weaker then the market, however it opened much stronger.

 Here's a 15 min chart for comparison and several dislocations, right now being one of the stronger ones, about on par with the last one which led the market lower.

 This is hourly yields and this demonstrates the problem I still have with the oscillator. There's a very clear dislocation between rates and the S&P and the S&P tends to gravitate toward rates, however, because the S&P was outperforming at the second cycle (the long one) and it is obvious to see the dislocation, the Oscillator doesn't work well here because it is based on RATE OF CHANGE and Rates were virtually flat, no change for ROC to measure, even though they were clearly weaker and dislocated from the market and even though the market fell toward them. Currently in the price window, the dislocation is obvious.

 The intraday of rates is deceiving because of scaling, but note that they have not moved higher since Monday while the S&P has, the red trendline shows resistance in rates and intraday they are leaking lower as well as seen at the red arrow.

A little longer scale look at Rates.