End of Day Wrap

Lets start with last night's EOD Wrap, "The Fed Effect"

Yesterday before the F_E_D minutes were released, I reminded as always before a F_E_D event, to beware the knee-jerk F_E_D effect. I wouldn't say the initial decline was what I was referring to, I think most of you found the late day rally to be the strange event.

As I showed last night, late day bounce had no correlation to anything other then ES reaching VWAP, from last night's post...

After the decline at the release of the minutes, the bounce up to ES's VWAP was the only correlation and only explanation I could find and I showed you a lot of assets last night that weren't moving with stocks. I said this in conclusion...

" The most likely reason for the rally at the end of the day had nothing to do with any correlations (algo arbitrage) and looked a whole lot more like a run for ES's VWAP. I wouldn't think the larger trade size at the VWAP would have been buying as the average trade size during the move up in ES was smaller."


Yesterday as ES reached VWAP, 3C went negatively divergent, suggesting selling at VWAP which is what you'd expect any way.


Today's afternoon bounce, although not much had 1 thing in common with yesterday...

 ES moved off the lows of the day today to hit its VWAP and what happened there?

3C went negative. Note the smaller trade size during the positive divergence and the larger volume once VWAP was reached. Again for the second day, it looks like the afternoon bounce was about nothing much more then reaching VWAP and dumping or selling short ES contracts.


There was an intraday positive divergence in the market averages which I thought, might be able to back and fill some gaps, however toward the end of the day they started to fall apart a little. Whether they too were selling as ES reached VWAP or whether it was margin calls or something else, it will be hard to say until we see what it looks like tomorrow. However I think at this point a pretty good argument can be made that this market is falling apart fast, despite volatility which is a sign of a top as I pointed out in last night's post linked above with the charts to prove it.


You may not fully appreciate today's action so I put together a few charts...

 Today was the second biggest 1 day decline in the Dow for the year.

 It was the biggest loss in the NASDAQ Composite Index for the year,  also note the very volatile 1 day moves up, also how they are declining in strength. In fact, the entire area from March is seeing huge volatility swings compared to the earlier trend.

 The biggest 1 day loss for the NASDAQ 100 for the year

 The 2nd biggest loss for the Russell 2000 for the year

 The 2nd biggest loss for the SPX for the year

 The biggest 1 day loss for Tech this year

And while this chart may not look like much happened in treasuries, this was the biggest move up in treasuries for the year with the biggest move down in yields. Treasuries become the trade of choice when traders are exiting the market and looking for a "Flight to safety" trade.


A few others, Consumer Discretionary, Financials and Semi-Conductors saw their 2nd biggest 1 day loss of the year and these are just a few of the tickers I looked at.


I said a few weeks back that Europe has been quiet for what seems like months, not a bother to the market, but that is about to change. Obviously from the overnight news flow, both Europe and Asia (China in particular) are seeing big problems.


Here are a few European markets...

 I think now that US data is coming in consistently bad, we can put the debate between decoupling or lagging behind us and safely assume that the US markets are lagging the EU markets, they are not off on their own ready to hit Dow $15k. Since the EU is the heart of recent worries, like it was in 2011, this chart of the SPX (green) compared to the European Top-100 is noteworthy. During 2011 Europe clearly topped first and headed down in to the US's July market plunge.  Again the EU markets have started rolling over and they have a lot in common with the US markets on this latest rally.

For instance, from the 11/25/2011 pullback to the highest high, the SPX has gained 22.47%, The Euro Stoxx Index over the same period gained 24%, the Euro Top 100 gained 21.52%, all very similar.

 The Euro Stoxx 50 has given a sell/short signal on my X-over screen and is below the 50 day and below the early March lows at the red 50-day moving average. In fact, ALMOST every long in the index since January 19th is now at a loss.

Anyone having bought in the white box is at a loss as nearly 50% of the rally since the 11/25/2011 lows has been retraced. Since January 1st, nearly the entire rally has been retraced and it only took less then 3 weeks.


The Euro Top 100 Index is also giving a sell/short signal, it has broken below the 50 ma, and below March lows support. This index is less then 1% from retracing the entire year's rally.


End of day trade looked like this...

 Again today, like yesterday, commodities didn't want to have anything to do with the market's move up at the EOD.

 Commodities tracked much closer to the Euro/$USD correlation, again just like yesterday.

 The $AUD which was in line with the SPX most of the day (intraday), also didn't want to have anything to do with the small afternoon bounce.

 On a longer term chart, because of the poor economic readings overnight out of Australia, the $AUD is making new sell-off lows, but this effects carry trades, which in turn effect the market. In fact the Yen and the Dollar were both strong today, that would force carry trade unwinds and the selling of equity positions.

 Using the correlation of the Euro as a proxy for the inverse correlation of the $USD which is harder to compare, again today the $USD gave the market no reason to bounce in the afternoon, once again it looks to have been about VWAP in ES and you saw what happened today to the market on the open after yesterday's much stronger afternoon rally in to ES's VWAP.

 High Yield Corporate Credit was down on the day and moved with the SPX a bit, but then sold off in to the close.

 On a longer term basis (credit has been warning about this rally for a while), as I have mentioned, it looks like credit is going to move to a new low, it is just barely off it now.

 The Energy Sector showed decent relative momentum vs the SPX today...

 Financials showed an early bounce in relative momentum, like they wanted to get something going, then petered out at the end of the day.

 Here's XLF's relative strength vs the SPX, basically the same as above.

Tech made a late day surge and was probably largely responsible for the afternoon bounce.


The dominant Price/Volume relationship across the board today was Close Down/Volume Down, this normally indicates the market has not reached a 1-day oversold position and leaves the door open for more downside.


Compared to the market internals, the Dominant Price/Volume relationship is a bit odd as today's action came on higher than avg. volume (NYSE 832 mln, vs. 805 mln avg; Nasdaq 1760 mln, vs. 1719 mln avg).


 Decliners outpacing advancers (NYSE 586/2428 Nasdaq 484/2062) and by a wide margin, this is the kind of event that can cause a 1 day oversold condition, but as far as the actual components go within each index, the dominance was seen in lower close/lower volume, which suggests there were a lot of stocks  (although not dominant, but in second place) that sold off on very heavy volume. This too can create a 1-day oversold event in the individual stocks as well as the market.


It really comes down to whether the gaps are filled or not, either way is fine for me. If the market doesn't bounce tomorrow, then the gaps will likely become bearish breakaway gaps because I can't see how Friday's NFP is not going disappoint, which would set Monday up for some nasty market action. If the gaps are filled on a bounce tomorrow, then I'll be looking to add as many decent looking short positions as I can (of course they'll all be listed on the site). All the pieces of the puzzle are coming together, the high volatility isn't associated with a market consolidation. The break in currencies/carry trades and the $USD strength are major market negatives. Nearly every leading indicator including 3C is negative, nearly every leading correlation is negative, Europe is back in the spot light, their markets have turned and as you can see in the first Euro chart above, they tend to lead US stocks lately with the problems in the EU. Insiders are selling at the fastest pace seen since before 2007, money is exiting the market, the use of margin is huge with traders having negative equity (margin calls/squeeze). 


Here's what's on tap for tomorrow in the US

Chain Store Sales 

Challenger Job-Cut Report
7:30 AM ET

Jobless Claims
8:30 AM ET

James Bullard Speaks9:10 AM ET

EIA Natural Gas Report
10:30 AM ET

3-Month Bill Announcement
11:00 AM ET

6-Month Bill Announcement
11:00 AM ET

3-Yr Note Announcement
11:00 AM ET

10-Yr Note Announcement
11:00 AM ET

30-Yr Bond Announcement
11:00 AM ET

Treasury STRIPS
3:00 PM ET

Fed Balance Sheet
4:30 PM ET

Money Supply
4:30 PM ET

As of right now, 3C is leading negative in ES. If anything comes up overnight I'll post an update. I suspect there will be a lot of trade ideas posted tomorrow.

Have a great night.