As of Tuesday (pre-AAPL earnings) we saw pretty clearly that Tech was set to take the baton of leadership and run with it. This is something I have been looking for to complete this bounce and as unlikely as it seemed, I was looking for AAPL to lead that move. Hard to believe that AAPL could move up nearly 9% in one day and over 10% intraday? No, not with this market's increasing volatility, for heaven's sake, look at the shakeout move WMT staged; look at the NASDAQ seeing the best day in 4 months and most of that was rally time, or how about the previous week with the biggest 2-day gain for the entire year in the SPX while the same week posted the biggest weekly loss for the year. How about CAT's (one of our short ideas) biggest loss in 7 months or NFLX's 14% drop on a headline beat (although guidance was the problem. Although I haven't run recent volatility comparisons, we know that as of a little over a week ago, volatility had more than doubled since February and gained 50% over the prior two week period; this is also something I have been warning about, "Volatility will continue to increase" and I'm not ready to say it's done, I am more than willing to say volatility is a clear sign of a top, even if volatility were not associated with tops, the change in volatility from February is a change in character in the market and changes in character lead to changes in trends. The point being, "Can we see a strong volatile move up from here and still have an ultra-bearish market?"-the answer is a resounding yes, not only possible, but likely. My end of day analysis was showing late day positive divegences building.
Even though this bounce off the April 10th lows when we first identified the likelihood of a strong, volatile bounce, has been surprising in the choppiness and the length of time put in thus far, all of our macro market themes that were expected have played out; the most recent being the switch in leadership from Financials to Tech ( +.85% vs +2.83% today). We even got the early AAPL under performance exactly right with AAPL coming in late to essentially act the role of the market and finally give the signal that the market is ready to enter stage 4 decline.
There's a lot to look at, there's a lot to talk about, but I'll try to keep this focused on near term expectations.
Today was exceptionally difficult as there were 2 themes that on the face of it, are contradictory; 1) the push for higher prices as our theory on April 10th for a bounce was for the averages to break through important resistance, shakeout the shorts on a volatility shake out while 2) any and all strength is being sold in to. This is what Wall Street does best though, move the market higher while distributing in to strength, the difficult part though is the hedge fund flock is starting to disperse in to what I've called the "Every person for themselves" effect, which is much different than the normal flocking of hedge funds/institutional money so no manager stands out as doing worse than the flock. Hedgies can keep clients even when they under perform, so long as they don't under perform the flock (well at least they have about a 2 year grace period in which clients will put up with under performance). The point being, 3C is built for this kind of market, it is built to show the contradiction between higher prices and market price strength, however the institutional money dispersion is creating very messy short term charts and that is where we need the most clarity right now. The macro trend in underlying accumulation/distribution is pretty much already set in to motion, the market is in trouble, it is now no longer of analysis to figure out the strategic positioning, it is fine tuning of analysis to figure out the tactical timing.
What did the F_E_D actually say today? If you cut through the red-lined policy statement, it really wasn't much different then the last one, however market conditions have deteriorated severely since the last statement. Did we see the typical F_O_M_C knee jerk reaction today? I'd say no, but we didn't see the market fall apart today either with there being no mention of Twist or any hints of QE 3. Why? I don't believe the F_E_D is so out of touch that they can't understand the shift in Macro-data and in 2017 we will see exactly what the F_E_D had to say over the last two days. A;though I didn't expect QE3 or really even a hint of it because of gas and food inflation, there are a couple of questions in my mind. Approximately a trillion dollars in to stimulus, what has the F_E_D really achieved except to give banks, Wall Street and Corporate insiders a golden parachute? Not much. Do I believe the F_E_D when they say they will keep rates low for an extended period of time? Yes, to do otherwise would simply cost the government more money in servicing our insane debt load. Do I believe in "transitory soft spots"? No, the global economy is showing clear signs of disruptions with many EU countries entering a double dip recession, the UK was the latest victim and this hasn't happened there in nearly 40 years. The academics said the US is decoupling from the world economy, of course they said that when economic data was heavily massaged early in the year with arbitrary seasonal adjustments that no one could figure out because they weren't based on anything other than what they wanted the end result headline number to look like. If you actually took the time to look at the economic data's sub-indexes, the weakness even is the strong data was clear. Now we have this nifty little chart that makes the US economic data trend even more clear-
Citigroup's Economic Surprise Index...
Pay attention to the date around mid-February-March in which the economic data started to surprise to the downside and compare it to the charts I'm going to present.
We talked about gold today and how gold will likely be the sentiment indicator for dumb money's hope for more QE.
Pre announcement today we had an inverse relationship between the SPX (green) and GLD (red). After the statement that lacked the dovish QE bias, GLD fell, it, along with 30 year treasuries were the only really strong initial knee jerk reaction, but as I showed you, GLD was accumulated at the intraday lows and then moved higher, but this time in correlation with the SPX. The market will give you as many reasons as you need to justify whatever opinion you want to have, and while the policy statement did not give the QE addicted longs what they wanted, Bernie's press conference made several "Greenspeak" hints that as usual were just ambiguous enough to interpret any way one would like to, we seek the hard data, but welcome unsubstantiated, unsupported moves higher as we or at least many of us build our longer term short positions.
To some charts, we'll start with FX, ES and CONTEXT and then our Risk Asset Indicators.
FX markets saw some extreme volatility today, but since the close (red arrow) the EUR/USD has gently leaked higher, lacking the earlier volatility of the US session.
The often leading indicator known as the AUD/USD also leaked gently higher, indicative of some support for ES overnight thus far, but nothing spectacular. I certainly would not call this move higher in the $AUD a sign of "Carry Trade On", as such it looks to be the simple support the market would need to head fake its way higher. However (you are probably sick of the analogy) the reason I'm already building a short position is because we are on that ledge that is making cracking sounds and another perfect storm in Europe like we saw Monday, could indeed cause Wiley Coyote to look down, remember, even after the ledge breaks, Wiley never falls until he looks down, which may be the perfect analogy for where this market is.
ES saw a late day move higher in to a wedge, the technical implication is the wedge breaks lower, the reality is the wedges almost always have a head fake move to the upside first. ES hasn't seen very strong after market momentum because the $USD is only leaking lower gently right now. 3C is showing a leading negative divergence in to tonight's high-All strength is being sold.
The last few days I have showed you how the CONTEXT ES model has been supportive of higher prices, ES has reached reversion to the model's mean and now the underlying component that make up the ES model are showing ES as overvalued and the model is diverging away from ES at an increasing spread.
As for our own indications...
Remember, the SPX is always the green line. Commodities intraday saw a lot of weakness as they would be a beneficiary of a dovish policy statement. I haven't put the charts together, but between GLD's negative divergence just before the policy statement and the subsequent action as well as Commodity weakness, I wouldn't be surprised if an embargoed copy of the policy statement "somehow" managed to find it's way to Wall Street. The afternoon move higher was directly attributed to Bernie's press conference where he let a few "possibly dovish" phrases slip.
In this one case the $USD is in green vs commodities, first note the volatility in FX land, second note the inverse legacy arbitrage that saw afternoon dollar weakness lead commodities higher, again, I'm convinced this was because of Bernie's Q&A after the statement, we all know it wouldn't be the first time in the last month Bernie has juiced the market when it needed it the most, like the day after the first weekly close down in the SPX for the year. I don't think he's trying to juice the markets for his so called "Wealth effect", I think he's just helping some friends like Lloyd and Jamie get the market in to position to do what we have expected.
High Yield credit as I have shown over the last several days, has been supportive of higher prices, it saw some selling late today and it will diverge from the SPX before the market reverses.
Yields also went negative on us today, although I wouldn't read to much in to that today as Treasuries were one of the primary knee-jerk movers. These will also negatively diverge.
In the top area (remember where the Economic Surprise Index turned), the longer term view of yields and trend are clearly negative and have already demonstrated their leading tendencies.
The $AUD, another great leading FX indicator seemed to be in line with the SPX intraday
However stepping back a little, you can see the $AUD is starting to diverge negatively from the SPX.
Even longer term, (again, recall where the economic reports started turning), the $AUD is clearly showing the carry trade there is off and the $AUD is leading the market to the downside, despite this small bout of relative strength,
The Euro's normally tight correlation with the SPX was very volatile today, I suspect it performed worse than the correlation to the $USD on a relative basis, reflecting the trouble in Europe which will soon be front and center again.
As mentioned over the last few days, the Euro has been supportive of higher prices, today the two reached a reversion to the mean.
As talked about this week, the trend in the Euro recently is stronger than expected considering the EU situation, this I'm 90% sure has to do not with Euro strength, probably not even the Chinese bid at $1,30 to maintain their exports to their leading trade partner, but rather reflects the huge hole in European bank capital and liquidity. The actual mechanism which appears on the surface to be slightly bullish, is actually very bearish, it is the sale of $USD denominated assets held by EU banks and the subsequent repatriation process of Eros back to Europe; essentially they sell the $USD denominated asset, then sell the $USD proceeds and buy Euros- a simple supply/demand imbalance that on the face looks slightly bullish and algos read it that way, but is actually very bearish as they try to plug liquidity shortfalls, not to mention capital shortfalls which are much larger holes. Either way, it has been supportive of higher stock prices in the near term.
The actual trend in the Euro, this is a definite negative for US Stocks when considering the strategic positioning of the market and where we expect it to move to.
Although exceptionally volatile, the general trend in the Yen was as it should be, the last two days show the trend and correlation much clearer as today the FX markets saw a lot of volatility.
The longer term trend emerging in the Yen is market negative and a clear sign that the carry trade there has been unwound. The BOJ may intervene if the Yen appreciates much more, but BOJ currency interventions are very weak, almost a joke. However if you want to know what smart money has been doing, this is a road map; unwinding of the carry trade is a clear risk off/de-leveraging signal.
High Yield Corporate Credit was in sync intraday with the SPX, the last several days I have shown you how HY Corp. Credit has been supportive of higher prices.
Here we see some HY Credit negative divergences sending the SPX lower and in white a very market supportive positive divergence. I have noted this many times recently, HY Credit is VERY cheap and an obvious play for large money trades, it's no surprise HY Credit was chosen for a quick risk on move not only because of its relative cheapness compared to stocks, but...
also because it's in a shakeout move, knocking early April shorts out of their positions as Credit breaks out of the downtrend-this is transitory, the bigger trend divergence between Credit and the SPX should be a very clear signal of where the stock market is heading-CREDIT LEADS, STOCKS FOLLOW-period!
Energy was broadly off in the rotation scheme today, that was to be expected with flows moving clearly in to tech and that was evident before AAPL earnings.
As I showed you yesterday on the 3C charts, Financials came out of rotation today and underperformed the market while Tech rotated in, you can see the relative momentum which was strong on Tuesday and very weak Wednesday. They did see some momentum pick up later after the policy statement.
And what industry group do we have here? Why Tech of course.
Here's sector rotation for this week, although what I wanted to show was just the difference between Tuesday and Wednesday. Financials rotated out along with Energy, Industrials, the Defensive sectors like Utilities, Staples and Healthcare, while Discretionary to a lesser extent and Tech to a larger extent rotated in. Today was all about Tech. I said I though large caps would see some rotation out, take a look at Industrials or more specifically, CAT.
Intraday since the policy statement, financials did see some momentum come back in, Defensive sectors fell off hard, Energy started rotating back in on $USD weakness and Basic Materials made a late day comeback as seen in the commodity chart above.
My plan hasn't changed at all, I have a few speculative positions in Calls and Puts still open in the model portfolio, but for the most part I'm moving away from short term leveraged trades and in to longer term equity shorts (no options as I'm planning for the longer term and don't want the worry of expiration and rime decay to be a factor).
Today's only trades were to correct the AAPL fat finger trade and start a short there and to add to BEAV. I expect BIDU, which is already at a nice gain, to move up a bit where I'll add to that position. I've been phasing in conservatively, but am looking to add on strength.
If you are taking the same path, in my opinion it is crucial that you plan your risk management and position size before you enter the trade. I purposefully have entered in smaller size with lots of room on the stop, this will allow me to add on strength, but this was the plan from the start. I like the idea of phasing in to a position, but it must be part of your plan and not a reaction to higher prices in a bid to dollar cost average which is the worst idea Wall Street has ever promoted (or at least one of them). The difference is, when phasing in, I have planned in advance what my final position size will be, I'm not reacting to the market, but letting it come to me. Adding to a trade just because we want to short in to strength is one part of the equation, but the trade plan must be in place first otherwise you'll end up adding and adding, essentially chasing the market (which we don't want to do) and creating a position that is way to big for reasonable risk management.
I'll be adding a few stocks tonight and the areas I'm looking to add to them, I will continue positing these tomorrow.
No comments:
Post a Comment