Friday's ES action at VWAP and the Week Ahead

As many of you know, the VWAP (Volume Weighted Average Price) is a measure institutions use to judge how well a market maker or specialist filled their order.

Here's the trade in ES on Friday with VWAP overlaid.

As you can see, it appears there was selling near VWAP all day Friday, the selling would knock price down and the market maker/specialist would work the bid/ask spread to get near the VWAP to move the next chunk of the order. Buying near VWAP would send pries higher with market makers/specialists working the bid/ask to lower pries back near the VWAP. All day we saw the market ignore the FX legacy arbitrage correlation that it has been following for weeks (the Euro was much stronger then the market relatively on Friday, yet the market for the first time in weeks didn't follow the Euro). The only break above VWAP late in the afternoon seems to have come on news of an Obama initiative announced later in the day on Friday to extend and expand a foreclosure relief plan. However even as ES price hit the upper VWAP we saw a strong distribution candle on heavy volume at the second white arrow.

As mentioned Friday, GDP did not only miss the 3.0 consensus, but higher consensus such as Briefing.com's 3.2 consensus and apparently their were whisper numbers even higher. However, the miss wasn't what was the bad news, the devil was in the details.


The advance estimate showed real GDP increased at an annual rate of 2.8% in the fourth quarter.  That was below the Briefing.com consensus estimate of 3.2%, but the real focal point for the market is that the bulk of the increase stemmed from the change in private inventories, which increased $56.0 bln and contributed 1.94 percentage points to the fourth quarter change in real GDP.


Real final sales, which exclude the change in inventories, rose just 0.8% after a 3.2% increase in the third quarter.

The concern for the market is that the change in inventories will act as a drag on Q1 GDP growth since there is unlikely to be a build from current levels.

Upside momentum waned this week as the DOW posted its first weekly loss after 3 weeks on weekly gains. Furthermore the DOW has now seen 17 consecutive days of positive or negative moves of less then 1% which is the longest stretch sine December 2010.

Earnings have also become an area of concern. Earnings Analysts who once expected profit growth of 14.6 percent for this earning's season had cut their estimates all the way down to 6.8 percent by the time Alcoa kicked off earnings. Two days after GS made a long R2k call (usually a contrarian call), another unit in GS led by Dave Kostin reports that after trimming all of the fat from corporations, Q4 earnings have shown that margins are declining. The economy has peaked and is rolling over.


With 39% of the S&P having reported, positive earnings surprises are near record lows. With 195 companies having released, they represent 53% of the equity market cap of the S&P-500.

The percentage of firms beating consensus EPS expectations by more than one standard deviation (the definition of a positive surprise) is well below the historical average. The number of firms missing by more than one standard deviation is above the historical average. The ten year historical average of beat and misses equals 41% and 13%, respectively. So far this quarter just 24% of firms beat expectations and 17% have missed, and this on earning's consensus that were already significantly lowered before the season began (remember analysts lowered expected growth from 14.6 to 6.8% before AA announced).

As for the weekly performance of the 3 largest benchmark averages, The S&P-500 gained little over a point on the entire week (not a percent, a point) coming in at 1.34 on the week, the Dow lost 56 points on the week and the NASDAQ 100 gained 1% on week.

As we have been tracking, financials seem to be where the real trouble is as we have recently seen them go out of sector rotation. CITI  (C) has proceeded with deep cuts to banker pay by 30% for overall compensation and some bonuses by as much as 70%. This follows earlier announcements by Bank of America and Morgan Stanley which said they would limit cash bonuses to $150K for senior positions.

 This is bad news for the New York and NYC economy in particular as each banker job indirectly supports up to 3 downstream jobs. In other words between layoffs and compensation cuts, the immediate impact will likely be to leave New York City with hundreds of thousands of layoffs. Initial Claims should be watched for confirmation, but it is widely expected that they will go negative.

From a NYC comptroller report:

"The securities industry is critically important to the economies and budgets of New York State and New York City. It now seems likely that profits will decline sharply from last year’s level, job losses will grow, and cash bonuses will be smaller. Such developments would have a ripple effect through the rest of the local economy and hinder the recovery. In addition, tax collections are likely to fall short of expectations for this year and next year, complicating already tough fiscal situations for New York State and New York City"


OSC estimates that each job created (or lost) in the securities industry leads to the creation (or loss) of almost two additional jobs in other industries in the City. (The large income losses during the crisis have slightly reduced the value of the multiplier compared with earlier estimates.) OSC also estimates that each new Wall Street job creates one additional job elsewhere in New York State, mostly in the City’s suburbs. Based on these multipliers and the current level of Wall Street employment, 1 in 8 jobs in the City and 1 in 13 jobs in the State are linked (directly or indirectly) to the securities industry.


This chart shows the correlation between NYC financial jobs and the downstream Private sector jobs.

In addition, multiple Investor Sentiment Surveys are reaching extreme levels of bullishness, this has long been considered a contrarian indicator and even more so in the case of a sharp bear market rally, which is what I believe we have been in the middle of. The entire point of a bear market rally is to bring dumb money back in to the market to off load and set up large short positions, you can see them occur after nearly every major bull market top with the 1929 crash showing a significant bear market rally. It is my opinion based on studying bear market rallies and the bear markets proceeding them that there is a correlation between the extent of the bear market rally and the extent of the bear market (the "Bigger they are, the harder they fall' effect).

Here's the AAII Sentiment Index.

The long term average makes sense as most investor are inherently inclined toward optimism. Note how far the bearish sentiment has fallen from the long term average as well as a significant change from last week. THIS IS THE POINT OF A BEAR MARKET RALLY.

Here's the first bear market rally after the 1929 crash.

Here's the similarities between the 2008 top and bear market rally and the current market position. I won't get in to all of the similarities between the two periods, but I have covered them before and they are numerous.

S&P-500 2 day chart.

In addition, many of the averages have recently seen a Stochastics negative crossover from their embedded positions.

 Dow-30

 NASDAQ 100

S&P-500

Another sign of waning momentum can be found on the weekly SPX chart.

A weekly Doji shows the loss of momentum this week.

The price Rate of Change charts also show similar findings.

 Dow-30 Price Rate of Change

 NASDAQ 100 Price Rate of Change

 Russell 2000 Price Rate of Change

S&P-500 Price Rate of Change

Several Breadth Indicators also show deteriorating breadth, (these could take up a whole post alone).

 % of stocks 1 channel above their 200-day moving average. Clearly this metric (green vs the SPX red) deteriorated during the 2011 top, it hasn't recovered during this move.

 The same indicator, except it uses 2 channels above the 200 day moving average shows the picture in even more extreme terms as the market has rallied on thin breadth.

 The long Term McClellan Oscillator has called several bottoms as well as tops via divergences.

 Here's a closer look at the more recent activity in the MCO vs the SPX, it remains at a significant negative divergence.

The NASDAQ Composite's (all of the stocks trading on the NASDAQ network) Advance/Decline line easily pointed out the failure in A/D breadth at the late July decline with a divergence, now it is much worse then the decline of late July which was quite sharp.

Friday's Price / Volume Relationships also show some interesting behavior (recall that over the last week we have seen 2 consecutive days with dominant P/V relationships that were the most negative of the 4 possibilities, it just so happens this has also been the weakest week in a month).

 All Stocks in the system: The dominant feature was the most bearish relationship, Close Up/Volume Down.

DOW-30 component stocks, Interestingly we see the dominant relationship which also happens to be the hallmark of a bear market, Close Down and Volume Down, however, it should also be pointed out that 28 of the 30 Dow stocks declined on Friday with only 2 advancers, both in the most bearish P/V relationship of Close Up/Volume Down, not 1 stock closed with a bullish P/V relationship.

NASDAQ 100's strongest P/V relationship was also the most bearish.

The same is true of the Russell 2000, but in much more dominant fashion, meaning this P/V reading is even more bearish then the NASDAQ 100s.

S&P-500 also showed the most bearish P/V relationship.

As mentioned earlier, the point of a bear market rally is to sucker in dumb money, with bullish sentiment so high and the market losing momentum, smart money may want to act before bullish sentiment falls on a weakening of market momentum. While bear market rallies tend to be very sharp and convincing, downturns from them are even more dramatic as fear is a stronger emotion then greed, that is obvious in any market cycle, for example the 2003-2007 bull market gave back everything and then some in 6 months with the majority given back in approximately 3 months.

Thus far ES has opened lower tonight and back to its VWAP while the Euro has opened the new week's session down.

Have a Great Week!

Germany Revealed

In yesterday's article, The Greek Drama Hits An All Time Crescendo, I mentioned that Germany wants a new "Budget Commissioner" enshrined in the Greek constitution, effectively handing over Greek sovereignty to some shadowy EU figurehead that I described as, "... a figure head who is clearly an agent of Germany."


Although these requests or rather ultimatums have been under the guise of the Troika, clearly today the originator of the ideas has been unveiled and you can guess who is behind it all. German Economic Minister, Philipp Roesler, was quoted today in Germany's BILD and reported by Reuters as having said,


 Greece must surrender control of its budget policy to outside institutions if it cannot implement reforms attached to euro zone rescue measures.
More...
Philipp Roesler became the first German cabinet member to openly endorse a proposal for Greece to surrender budget control after Reuters quoted a European source on Friday as saying Berlin wants Athens to give up budget control.

"We need more leadership and monitoring when it comes to implementing the reform course," Roesler, also vice chancellor, told Bild newspaper, according to an advance of an interview to be published on Monday.

"If the Greeks aren't able to succeed themselves with this, then there must be stronger leadership and monitoring from abroad, for example through the EU," added Roesler, chairman of the Free Democrats (FDP) who share power with Chancellor Angela Merkel.

The Financial Times reported on Saturday that it had obtained a copy of the proposal showing Germany wants a new euro zone "budget commissioner" to have the power to veto budget decisions taken by the Greek government if they are not in line with targets set by international lenders.

"Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the document said.

For a period of time? Then why would there be a need to put a temporary measure in to the Greek constitution?

At the end of my article yesterday, I finished with the thoughts below, clearly in making this seemingly conspiracy theory like statement, I myself suffered from a lack of imagination...

"This situation is very fluid and the consequences for the European continent are politically the most sensitive since WW2. What for example happens when Ireland, Spain , Italy and certainly next, Portugal are bribed in to accepting similar agreements? Merkel's CDU have indeed been busy little bees."

However from the same Reuters article, it goes on....

"A government source in Berlin said Germany's proposal was aimed not just at Greece but also at other struggling euro zone members that receive aid and are unable to make good on their obligations."

Since Portugal is already in need of a second bailout, it should only be a matter of days before we here the initial details of Portugal being bribed with the same transfer of national sovereignty, again enshrined in their constitution.

Since yesterday when Greece formerly declined the offer, now uncovered as a plot hatched from Germany itself and not the Troika, although at this point one could hardly distinguish between the two, the Germans have again gone on the propaganda offensive.

As Greek Finance Minister  Evangelos Venizelos astutely said on Sunday to reiterate the Greek position, 

"Anyone who puts a nation before the dilemma of 'economic assistance or national dignity' ignores some key historical lessons,"

Germany has started a propaganda campaign, first as of today revising the actual amount Greece needs from the agreed $130 bn Euros in October to their new revised figure of $145 bn Euros today through an article in Der Spiegel. The debt talks are all of the sudden a moot point, the ratification of the $130 bn Euro tranche which was originally dependent on the outcome of the debt talks, has now become dependent on Greece giving up sovereignty (how quickly the picture has shifted since the initial rumors this Friday!)  As the clock ticks for Greece's next debt servicing in March which is impossible without the aide and will send Greece in to default, which as of now looks to be another moot point, Germany has for some reason (one day after Greece declined the German offer/black mail), all of the sudden lifted the bar of how much Greece needs to remain solvent. While I could speculate as to why this is coming out now, I think I lack the imagination to understand the German end game's tactics, I just note that it's strange for Germany to say Greece needs more after clear signs that NONE is coming.

Meanwhile, the politically unpopular bailouts in Germany, which have cost Merkel's CDU party in regional elections, is taking on a new tone from Party insiders and affiliated parties that share power with the CDU.

Here's unfortunately a Google Translation of the Spiegel article as I could not find it in English (I made some modifications to make it more clear)

The situation in Athens is more dramatic: the EU wants to take control of Greece's budget, the rescue package for the ailing state amounts to SPIEGEL informationon 145 instead of 130 billion euros. In Berlin, broad resistance formed to further aid.

 It's like a bottomless pit: the planned emergency measures for Greece are not enough to lead the country out of crisis. According to the troika of the EU Commission, European Central Bank and the International Monetary Fund, the country still needs one additional 15 billion euros.  billion euros,  decided in late October last year.

And the VERY sudden shift in tactics from the debt talks to Friday's developments...

 "We do not believe that you can collect the missing money solely with the private creditors,"  says the Troika.

 "Our attitude has not changed," CSU head Horst Seehofer said in SPIEGEL. "For reform standstill, there can be no more money." The CSU rejects new aid for Greece over the programs adopted, Seehofer said. "If the Greeks do not implement the reform programs, they can get no further assistance."

Also FDP parliamentary leader Rainer Bruederle calls for a relentless attitude towards Athens. "Solidarity is a two way street, so far as the European Community must stand firm and demand the necessary structural reforms," ​​he says. "Only when the Greeks also provide evidence that they are serious, can we help the European Community."

"The Greeks do not lack the political will, but the economic power"

The first coalition MPs have already announced that they plan to vote against a new Greece package. The Bavarian FDP member Erwin Lotter, who has previously approved all the euro rescue packages would not do the same in the case of Greece. "I thought, the Greeks took their time," he says. "Now I am assuming that there is a bankruptcy, the problems cannot be solved with more money."

The CDU politician Wolfgang Bosbach Interior announced that he will not vote for new tools Greece. "The Greeks do not lack the political will, but the economic strength to get back on its feet."

"All Greek parties must finally show the absolute will to change anything fundamentally." The deputy chairman of FDP Toncar Florian said.

Based on the previous, disappointing experiences Greece must accept "for a certain period" sovereignty over its budget to the EU. According to "Financial Times" which has seen the plan, adds that Athens is required by law to use state revenues to pay down debt first and foremost.

The government in Athens according to information officially know nothing ofthe plan.

Interestingly, while Greece has been focused on resolving Private Sector Involvement, seen by the Greek government as the pre-requisite to the next $130 bn tranche of aide, they knew nothing of the 'Troika's" plan for Greece to cede sovereignty. Interestingly, although the IMF headed by Christine Lagarde is part of the so called , 'Troika" plan, as early as late last week she was making statements that the ECB should take part in the debt restructuring, something the German based ECB as well as Germany has been vehemently opposed to. The fact that Lagarde had been focused on resolving the debt restructuring and protecting the long held concept of equal and fair bondholder treatment and protections, seems to show that the IMF may not have had any hint of what Germany was up to, as mentioned earlier, this has all developed with rumors on Friday.

Now German politician's are seemingly saying that they are resigned to the fact that Greece cannot be saved no matter how much aide is thrown its way. 

With a Greek default, there will be huge losses among many banks in the EU and across the world. If the debt restructuring is given up as it no longer is the path to the next tranche of aid, that leaves the ECB massively exposed. Other then putting other nations such as Portugal, Ireland, Spain and Italy on notice, I personally do not understand what all of these sudden shifts are about.

One thing is certain, and that is the environment in the EU has just become VERY uncertain, something the market hates. Bond holders have no idea where they will stand in a likely Greek default. Hedge funds and banks as well as other financial institutions have no way of calculating what hedges need to be in place, several months ago they were trying to figure out what a return to the Greek Drachma would mean and where it would trade. 

I would dare to say the IMF itself is unclear on developments. As George Soros said post the Davos summit, "Instead of the IMF, Germany is acting as the task master imposing  tough fiscal discipline and this will generate both political and economic tensions that would destroy the European Union".

Merkel made statements hinting that Germany was leading the Euro zone and cannot make promises that clearly cannot be fulfilled. 

For Lagarde's part, she seemed disconnected from recent German plans and instead focused on EU solidarity in building a firewall to limit contagion, she went on to speak about growth and how it needs to be through tailor made competitiveness for each country. She happens to be the only one I have any respect for and seems clearly like she is out of the German plan loop, but what else is new in the EU, since the start one hand has not known what the other was doing. You can say there has been a massive breakdown of communication which has led to massive distrust.

Tiny-Turbo-Tax challenged Timmy G. talked about a firewall, but with clear undertones of the theme he has been pushing since day 1, ECB monetization and an American style QE, which has made T.G. an unwelcome guest in previous Euro summits.

Nouriel Roubini called the EU, "A slow motion train wreck and not only in Greece", also that the Euro-zone will loose several members including Greece and Portugal.

Oddly, Mexican president, Felipe Calderon sums it all up nicely (being aware that the US is not immune from EU contagion as JPM's  Jamie Dimon said last week on CNBS (CNBC), "we have a timebomb the bomb is in Europe and we are working together to deactivate it before it explodes over all of us."

This should be a very interesting week, not only because of the EU situation, but because of the thus far reported S&P earnings as well as many technical indications.