Risk Asset Wrap

Today wasn't much of a surprise, it's a 3 day weekend which means many on Wall Street either cut their day short or just made a 4 day weekend. The late day drift lower seems to have had no real underlying reason, it could have been a bit of buying in to lower prices, traders (retail) taking risk off over the long weekend as they'd have more influence on prices today with Wall Street running on a skeleton crew; I'll show you why I think this. As far as the bounce/counter-trend rally (whatever you want to call it), it's not surprising that nothing was kicked off today and in hindsight, this week with a 3 day weekend coming up. The main mechanism to move prices higher will be a short squeeze (note I didn't say "Catalyst", but I'd think there will be some catalyst news or policy event so CNBC can tell viewers why the market is moving), being a short squeeze is the main mechanism, you want to keep emotional pressure strong to force shorts in to covering, a 3 day breather isn't really conducive to that.

There wasn't much US economic data today, the Consumer Sentiment was an odd piece of data. I may be running with the wrong crowd, I don't see anyone around me that is hopeful for the future. In fact there are several people that I consider to be American success stories, people who came to this country from Poland or Cuba that went from nothing to creating multi-million dollar businesses. These people surprisingly lived well within their means (one was worth millions and lived in a 1200 sq ft home with no TV in the house). The point being, these were really successful people who overcame incredible odds and were self-made millionaires, now they've lost their businesses and are fighting to keep their homes; so that Consumer Sentiment print seemed very odd.

Late this morning the IAEA said they found highly enriched Uranium in Iran and that Iran had doubled its Uranium output over the last quarter, while I won't read too much in to this, I suppose it couldn't hurt the USO calls added today.

Some of you might remember the post about "The Tipping Point" or point of no return in which events spin out of control, I had used Lehman as an example and how the liquidity freeze had far reaching and unpredictable effects, like GE being locked out of the financial markets to the point in which they were close to not being able to make payroll and their not a bank. Earlier today I mentioned Spain's Bankia which went from needing $9 bn Euros to get out of the hole their in to $15 bn Euros as of this morning and by this afternoon te bank needs $19 bn Euros. You may also recall the headline from the head of the Greek police pleading with citizens to put their money back in the banks as it was not safe elsewhere. The less confidence clients and other banks have in counter-parties (other banks), the worse the problem becomes, with bank runs reducing capital, margin maintenance being raised on their assets, etc. it just snowballs out of control. Lehman might have been able to be saved had that snowballing not occurred. However once it did, not only was Lehman a goner, but the entire US financial sector was in danger of collapse, AIG was in danger, GE was in danger; the spider web of connections and ripple effects is just unpredictable, the F_E_D and the Treasury themselves were being told about AIG by bank CEO's, they literally were caught off guard as the system came unglued so rapidly. So in light of this and one of Spain's regions already calling for a bailout, I think it won't be long before the bond vigilantes put Spain in a position in which they have no access to financing and that' when the "B-O" word comes knocking. Knowing that Europe can't handle a Spanish default much less the perfect storm should Greece return to the Drachma and stick their lenders with worthless IOUs, we have the making of a true BlackSwan event, yet the market held up reasonably well recently-curious huh (sarc.)?  

This is exactly why I wouldn't close any shorts even though there's a decent chance they could be traded around for a decent profit, you just don't want to be caught empty-handed when one of, if not the greatest financial/economic disaster of the post industrialized world's history takes place.

Not surprisingly S&P downgraded some EU banks today, they said it was coming and there will be many more; for today I believe they downgraded 5 or 6 Spanish banks including the nationalized Bankia (rating: Junk). 

FaceBook, the IPO that would bring retail flocking back to the markets has officially received the title of "Worst IPO in 10 years" based on their first week of trade. I can't wait to see the lawsuits. I never learned much about IPOs as I don't see how you can possibly have an edge in a new issue, especially one brought public in a market environment like this.  I did some reading about "Greenshoe" options in the IPO underwriting process, which if you Google the term, you'll understand a bit more about why Morgan Stanley fiercely defended $38 for the first day and then gave up,  the "Greenshoe" options  explain the process and you'll get an idea of what went wrong or at least why MS could no longer defend $38. I don't expect we'll see MS getting any future prime IPO business in the near future (like maybe a decade).

Now for one of the most exciting confirmations of 3C! You probably recall the recent charts I posted of CHK  after the BlackRock announcement they had been accumulating shares, I had also been working with a member who was in the trade. Even this morning I posted CHK as an example of how a large position takes time to accumulate (I compared the market divergences with CHK's).

Here's the chart one more time...

Note the positive divergence/accumulation starting almost exactly on April 19th. Here's you'll find a story from ZH about how Carl Icahn accumulated 7.5% of CHK specifically starting on none other than April 19th! I rarely get to see this kind of real confirmation so I thought you might enjoy it and get to understand a little more about the process.

Now on to the Risk Asset Layout Update which I find very interesting.

 First commodities vs the SPX (SPX always in green unless otherwise specified), commods held up pretty well today, I think a lot of that is the precious metals -gold/silver, which leads me to this chart...

This is GLD in green and the $USD in red, they normally have an inverse relationship. May 16th seems to be a significant date, it's when we first noticed something was going on with currencies. Recently we've identified Gold's main correlation and it wasn't a risk on trade, it wasn't flight to safety, it is sentiment toward the likelihood of Central Bank easing. Above I mentioned that a short squeeze is the mechanism to send the market higher, but not the catalyst; gold breaking the correlation with the $USD over the last 3 days and rallying in to dollar strength (very rare and unusual except in one environment) is very odd and to me, suggests that the chance that the catalyst for a market move higher is based on Central ban intervention is pretty high as gold is one asset that tends to do very well with monetary easing. Just food for thought as this is 3 days of trading with the dollar instead of against it.

Back to commodities...

 I find it interesting commodities and the Euro rallied while the market was falling in to the start of our bear pennant in the SPX, now they've nearly reached reversion to the mean, partly as the market moved higher-remember accumulation is often in to lower prices, just look at that CHK chart above.

 This long term chart shows commodities tracking a risk on move with the SPX, if you look up the dates of when QE1 and 2 began and ended, you'll see why commodities moved as they did as they too benefit from monetary easing, 2012 lacked QE, only Twist. The market rallying as it has while commods have not even come close suggests to me that this most recent rally may be one of the largest head fake/distribution rallies we've seen in a while; I've mentioned my thoughts about this before.

 Today you can see commods did much better than their correlation with the Euro (blue), it appears stocks were more closely following the EUR/USD correlation, but you'll see they weren't.

 Again, Commods and the Euro up, the SPX down, why? My guess is accumulation of stocks.

 Yields on the 5 year are an excellent leading indicator, the market moves toward this red line like a magnet and the recent and only set of higher highs/lows in yields I believe is a bullish signal for the market near term. I don't want to confuse you as I'm very bearish on the market overall, but that doesn't mean we can't see a strong rally, bear market rallies are some of the strongest you'll ever see.

 With all of the latest new indicators, people have forgotten about the usefulness of Rate of Change to uncover trends that are otherwise hard to see, in light blue is ROC for the Energy sector, Energy is in red and the SPX green. ROC shows the change in Energy's momentum better than price alone and changes in character lead to changes in trends.

 Yesterday I mentioned Financials came in to rotation, here toy see yesterday and Financials in red gaining momentum just before the market did the same.

 Longer term Financials vs. SPX, there's some much needed support in financials.

 Here's ROC for Financials, interesting isn't it, a major shift right at our bear pennant.

 The $AUD currency vs the SPX was in near perfect sync today..

 While the divergence in $AUD, which is an excellent leading indicator for the market may not be very clear, it has made a set of higher highs/lows.

 And here's ROC for $AUD, to the left you can see momentum died in $AUD and ROC revelas it long before price revealed it, now there's a bullish change in character in $AUD.

 The Euro v SPX today, note early weakness in the Euro, but the market's afternoon weakness wasn't because of the Euro which made no lower lows and held support.

 Here's the triangle in the Euro

 And the Euro since the 9:30 open, note it held support all day so the market wasn't moving down with the Euro.

 This may look very similar to the triangle above, that is actually the long term downtrend line in the Euro, it's that close to breaking above it.

 This chart of the Euro vs SPX shows the 22nd and the Euro weakness on that day, same day Goldman said they are bearish the market and Papademos made his comments about Greece.

 Here's the Euro's ROC, it's a bit more bullish than price would lead you to believe.

$USD strength this morning, and it leveled off in the afternoon,  no correlation FX reason for the market to decline.

 Also interesting is the $USD vs the SPX, according to the correlation the SPX should be making new lows as the $USD makes new highs, I'm guessing that's not only a bear trap in the SPX, but there's more strength there than should be due to the positive 3C divergences.

 Now note the ROC in the $USD, 3C is showing a negative 60 min divergence, but you'd never guess that the $USD is showing momentum weakness by looking at price alone, this is near term bullish for the market, especially with the 60 min 3C negative divergence.

 High Yield Corp. Credit didn't look great today, but not a disaster either, remember a lot of traders were off today.

 HYC Credit (HYG) usually leads the market, here it didn't , note the dates and also that is in sync with the market now rather than being more negative.

 A longer vie shows why HYC Credit was stronger than you'd think, it was in the middle of shaking out shorts on a head fake move above the downtrend channel. Also note how a head fake move creates strong momentum once the reversal comes.

 High Yield Credit seen here didn't make new highs with the market, a bearish warning signal, but now it's not making new lows, a bullish signal for the near term.

 A member told m about FCT and its correlation as a leading indicator for the market, you can see here it divergence from the SPX just before the SPX fell.

 Near term though it is making higher highs and higher lows which it hasn't done since March 30th.

Finally the one 3C chart not shown today, the flight to safety trade in treasuries is seeing a 30 min negative divergence, suggesting asset allocation is moving from the safety of treasuries to risker stocks. Remember though, this is only a 30 min chart, impressive for a bounce, but the long term big picture is significantly more bearish for the market.

That's enough to chew on for now, I'll have some updates out I'm sure over the weekeend, have a good one.

USO July Calls

I went with July $34 for the options model portfolio

Going to add some July USO Calls

Not sure about the strike yet, but in the money.

 With the $USD looking like it is on a 60 min chart, this 15 min above and 60 min below look to be a reasonable trade. I don't like the profit potential in a straight equity long so I'm going to use options, I still consider this a speculative position for risk management purposes.

Bigger Picture-Not too big

In one of the last updates I mentioned short-very short term charts showing accumulation, but not seeing the same confirmation on longer term intraday timeframes, like 5 min. It looks to me like the same thing that happened yesterday is happening today, accumulation in to lower prices. Remember the pennant post from earlier today, there's several ways it could play out, a head fake move below the pennant and then a move bove which would pull in more shorts and ultimately give an upside move more momentum as they are forced to cover in a squeeze or a breakout somewhere in this area.

 Here's the pennant and the white areas are where there have been strong positive divergences, buying price weakness, it's exactly what we did on Wednesday the 23rd with gains in all of those positions, the same thing seems to be happening, whether we move to the lower trend line and post a head fake break down move or not is difficult to say, but I think the upside head fake move is more certain, it's just a matter of timing at this point and being I entered longs on Wednesday (I wouldn't normally do this without good reason, especially as long positions clash with my major market view, tells me we are very close as does the price pattern above.

 The short term charts are still showing increased positive divergences in to lower prices intraday, this is what happened yesterday before the market rallied in the afternoon and it happened on a much bigger scale on Wednesday, the market was VERY positive at price lows and we started buying before we had ANY upside price confirmation based on the strength of the signals, all of those longs are in the green.

 FXE is still leading positive, but pulling back in 3C a little here.

 The bigger picture is the positive divergence has made it to a 60 min chart, we haven't seen any market bounces over the last several months make it to the 60 min chart-the longer the timeframe, the more significant the divergence.

 IWM moving up in to somewhat lower prices short term 1 min

 IWM's 1st 60 min positive divergence

 QQQ has held up well all day in price and 3C-although rangebound, it was weaker yesterday, seems to be making up for yesterday a bit.

 QQQ 60 min leading positive right at the pennant.

 SPY 1 min 3C positive divergences in to some lower prices.

 3 min SPY

 60 min leading positive at the pennant

UUP-$USD with the first 60 min leading negative in at least two months, actually the last time it was leading negative was Jan 10th around the same price area and it fell to the Feb lows from that divergence. The Euro is a proxy for the $USD, what the market really needs is $USD weakness, there it is.

Anticipation of a Euro reversal?

So lets just recap a couple of things, Goldman puts out a "FREE" report saying they are bearish on the market, the last time they did this, they were bullish on the market in March, we know how that turned out, it was the same analyst in fact who wrote both reports. Hours later GS alumni and former Greek PM, Papademo says "Greece is considering back up plans for a Euro exit", this was non-news and just commons sense, but it moved the Euro (by way of correlation) the market lower. When was the last time Papademos spoke publicly? I can't remember and he certainly isn't part of the government or in a decision making role.

From the charts showing positive divergences in the last week or two, lets assume GS was already accumulating , from the recent 15 min charts which are much stronger, lets assume they used their propaganda unit to make one last push, lets also assume they're about ready now and well positioned.

Mario Monti comes out today (also Goldman Alumni) talking Greece up, that they'll stay in the Euro , although no one knows this, it depends on the elections in mid-June, even if he was on the phone with Greek leaders every minute, no one knows which one will win in June and the polls are useless, so Monti is out there talking up the Euro in a scenario in which he has absolutely no control. Do we hear the actual would be leaders of Greece that aren't Goldman Alumni saying anything market moving? No.

Now lets take a look at the Euro...

 Here's the larger trend, you can see it was moved over night on Monti's comments

 We have a consolidation pattern which suggests something is up right below an important resistance zone.

 2 min chart has gone leading positive

 same for the 3 min

Same for the 5 min, Even the spotty trade looks near term bullish.

The same Institutional stock trading desks have FX trading desks, they know what's going on with order flow in the currency. I guess we'll just have to wait and see.