EU banks have had liquidity problems for at least a year now and despite LTRO 1 and 2, they are still underfunded by up to 60% of their market capitalization. What to do? Issue nearly double the shares? Sell assets that have already been sold? Pledge assets to the ECB that have already been pledged? This is an exponential problem that is not getting any better and as we saw in the US starting with Bear Stearns, 1 bank's failure can have ripple effects that no one can predict. By the time Lehman was on the coals, GE, not the finance division, the entire light-bulb making (and more) corporation was having trouble accessing funds to finance day to day operations and in the US, corporations only count on 30% of their funding from banks, in the EU, the average is closer to 70%. You might call it the ripple effect, but it is more akin to a tsunami.
ES is a bit interesting tonight,
Commodities were the odd man out today, lots of weakness relative to the SPX. High Yield Corp. Credit STILL looks somewhat supportive of higher prices, maybe the Friday SPY $140 pin isn't that far off the mark?
If you take a look at the market and overlay AAPL, as I suspected, AAPL is the market-this is the end game we expected as this bounce got started.
You should see what was done to the NASDAQ Futures, they ran with AAPL in the afternoon and then dumped the entire day.
In after hours tech did well on earnings, this may give some weight to the $140 Friday SPY pin on opt. exp. MLNX, EBAY and FFIV all are up big after earnings tonight.
Internals were nothing special today, lower than average volume, decliners outpacing advancers, new highs outpacing new lows.
The bottom line is the underlying risk asset indicators, 3C, Credit, etc are all falling apart. I was worried about the 15 min charts not giving a clear signal, but if in fact we do see a SPY $140 pin, then at the rate the 15 min charts are deteriorating, we should have a very clear signal which is a relief. All other asset classes are diverging just like I expected them to except HY Corp Credit which is leaving enough room for that possible SPY $140 pin and I have to say, if we get that $140 pin, then the entire reason for the bounce will have been well justified as we originally defined the reason on April 10th. I feel pretty good that even through all of this volatility, nearly everything we have expected to see has materialized, it feels like we are dialed in to the market very well at this point and from what I've seen on some other retail trading sites, the crowd is at an absolute loss, not knowing which way to go, while the macro theme we presented has unfolded almost tick for tick. We've even had probably a dozen quick options trades making 7-200% during all of this craziness.
Spain will most likely define ES overnight and then we have the US economic data. We clearly have enough volatility to have a big day down if it comes to that tomorrow and still be able to see a $140 SPY pin on Friday.
Take a look at the VIX, it has a beautiful rounding area and a little bull flag, it looks perfect for our macro theme regarding what comes next after the bounce concludes.
So tomorrow we'll continue to look at ideas, but I'm not going to get too caught up in the market action with expiration on Friday.
All in all, I have to say I'm happy with our analysis from the 10th and the way things have unfolded thus far, as I said above, it feels like we are dialed in to the market at a time when I would think we'd be most lost.
Keep your eye on the big picture, it's not hard to mis as all of the underlying assets and indications are unravelling before out eyes.
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