Sunday, September 23, 2012
Sunday Night Opening
We are at an important psychological and technical level for ES right now.
ES 1 min from Friday's 9:30 am opening to present with Sunday night futures opening at the yellow arrow. This $1450 level is likely going to cause some congestion, I doubt it will be broke quickly without volatility. You can see a slight positive toward the end of the day Friday, it's difficult to say, but with the downside momentum that was in place, the positive divergence may have been just enough support to keep ES in a range for an op-ex pin.
The 15 min chart has called a lot just about every turn, there's a slight relative positive right now at the $1450 area.
Longer term the hourly chart has a negative divergence right at the F_O_M_C rally highs.
The daily EUR/USD chart just piercing resistance...
A closer look shows a set of 3 candlesticks that are a common reversal pattern which is confirmed, remember though candlestick reversals don't have a target, they just imply a high probability reversal which has already occurred and is now below support, now resistance again.
Here's the Sunday FX market open with a gap down in the Euro thus far, there's support around $1.29, $1.30 is a key level.
Gathering What We Can from Op-Ex Friday
As you know Friday wasn't just the typical 3rd Friday of the month/stock options expiration, but Quadruple witching being it was also the close of Q3 with additional S&P Index re-balalncing and CDS futures rolls Thursday. Friday's NYSE volume was the highest it has been in 13 months.
One description of Friday's late day action (and this may be significant because it was late day when almost all options expiration activity is already completed) was called,
"A case of small doors and large crowds into the close today (S&P futures ending 1 point above F_O_M_C-day close)".
S&P Futures closed at their lowest level in a little over a week with the downward momentum carrying in to the after hours.
Stocks however were visibly off toward the late afternoon, this wasn't just in price, but in underlying trade as well as you'll see with some example charts. However, despite the volume, the late day sell-off and the underlying trade in certain assets, we can't fall for the long time technical assumption that heavy volume and selling=Panic selling. I think most of us by now have seen how price can be very deceptive, however given the nature of the events on Friday and some other things we'll touch on, we also shouldn't assume there weren't some other things in play, especially in the hedge fund space which I will get to.
Given the QE3 announcement, conventional wisdom would expect to see the $USD lower on dollar debasement expectations, however (and this is just pieces of the puzzle, not conclusions), the $USD has been out of character even with the trend before QE3 was announced (again, no conclusions, but the pre-QE-3 dollar action is consistent with QE3 being priced in to the market).
This certainly isn't enough data within a trend this size to come to conclusions, but it is interesting to note the post F_O_M_C behavior as the $USD lost value in what appears to be anticipation of QE-3 and once it is announced, the behavior is very different (one could be forgiven if they expected the $USD to take a near vertical plunge upon the announcement of QE3). While the "QE is priced in" theory is just that, the price action in the dollar does seem to support the theory (under-performance as QE3 is expected in advance and a kind of sell the news -the $USD moves opposite most risk assets- on the actual delivery of the goods from the F_E_D).
Even if that theory was shown to hold water ( and perhaps even if it isn't shown to hold water), I do have a gut feeling there will be wide dispersion between industry groups and stocks within them.
For instance, if we look at the 4 major average (the Dow-30, SPX, NDX and Russell 2k) during different QE programs (1 , 2 and Twist)...
The averages are color coded and I added the Dow-20 Transports (DJ-20)
During QE-1 there's an either risk on or risk off stance among the major averages, this is fairly normal market behavior as most averages will move together, while there will often be differences in relative performance, the directional aspect remains fairly constant, either the market has appetite for risk or it doesn't.
QE-2 era starting with the Jackson Hole speech that effectively served as notice.
Even during Twist there's pretty good alignment, but recently the one index that is sensitive to macro economic conditions, Transports, is showing some dispersion from the group. Interestingly, while we did have periods of better macro fundamental data such as the first several months of 2012, even in periods which we saw poor macro fundamental data, the risk on theme prevailed even in transports as liquidity was the only measure of whether the market had risk appetite or not.
However if you look at the transports since the seasonal adjustment period (the first several months of the new year that skewed data to look more favorable than it was using arbitrary seasonal adjustments) ended, once the true data came out (without the benefit of seasonal adjustments and deteriorated badly), the risk on period in the market that we can trace to June 4th saw some interesting dispersion in the transports. The DJ-20/Transports are no higher now than they were at late June. Recently there has been an even more pronounced decline in transports, I don't think as a function of QE-3, but as a function of badly deteriorating business and manufacturing conditions. Whether you look at transports from June to present or the last few weeks, there's a severe underperformance theme that wasn't present in other periods, both during and outside of QE periods, but notably during QE periods. All that mattered for transports and their movement with the market averages was whether the F_E_D would be pumping liquidity in to the economy/market, this time they seem to be far more concerned with other events.
Since late August transports were moving directionally with the rest of the market, although at severe relative under-performance, but recently (again I think it has more to do with manufacturing data, but that may not be all) transports have fallen apart.
It should be noted that the Economic Surprise Index since about Jan 2012 to present has gone from +1 (positive) to -11 (negative), meaning the economic data has surprised to the downside quite a bit. In fact, as the SPX moves to 2012 highs, the Eco-Surprise Index has moved to lows below all of 2012, all of 2011 and about 1 or 2 points away from 2010 lows. I know this is hard to visualize, but since 2009 when the Economic Surprise Index hit lows of about -33, the Index has actually been in an uptrend, eventually moving in to positive territory early this year. While the current -11 is nowhere near as bad as the 2009 lows, it is the first time since those lows that the trend in the indicator has made a lower low, thereby breaking the uptrend since 2009.
This chart should give you a better perspective...
The blue line is the Economic Surprise Index, what is interesting is the divergence between the SPX and the Index as for the first time it has a large divergence in it as well as the uptrend being broken. The divergence with the SPX headed higher before QE3 was announced "may" be more evidence of a market that already priced in QE3. Why is the SPX heading higher in to bad economic data? My guess would be the expectation of dollar debasement/QE3, there was no liquidity in the sterilized operation twist as whatever was bought in the long end of treasuries saw an equal amount sold in the short end, therefore no new liquidity was introduced in to the market during this divergence, so it is quite possible this is pricing in expectations.
If the move lower in transports does have anything to do with QE-3 being announced (visually it looks like it does), my guess would be that it comes back to the problem if manufacturing contraction, the fact that end demand is low and input costs are high, debasing the dollar in both previous versions of QE has caused strong inflation in commodities and there's the catch 22 that I mentioned during Bernie's press conference on the day QE3 was announced, the market had a noticeable reaction when he was asked about whether a rise in inflation would cause adjustments in the program and through the veil of F-E-D speak, Bernie essentially said yes. If manufacturing is in decline and further decline is expected, then the price action in transports makes perfect sense as they are the end of the line.
Just from my own perspective and then later voiced by former F_E_D governor Warsh, something doesn't seem to sit right with the intended goal of QE3 and the reality of it being announced now. Warsh said it looked like the F_E_D was panicking in an environment that didn't warrant panic. From my own perspective after correctly visualizing the holes in EU policy actions as they were announced, it seems simple: If the F_E_D's goal is to lower unemployment with QE3 (and recall that the goal was stated as "lowering unemployment within the context of price stability") which is half of their mandate, the other being price stability, it makes no sense whatsoever to introduce QE3 that is not sterilized (meaning that doesn't create more money out of thing air, rather than sterilized in which the money supply remains constant). Manufacturers the world over are seeing a decline in orders, they have stock on their shelves and as a result they aren't using their manufacturing capacity and are letting employees go; in addition their input costs are rising due to inflation. Debasing the dollar makes purchases more expensive, savings are worth less, prices for every day consumer goods like gas and food are higher. Manufacturers need consumer demand, but consumers are already feeling the pinch of food/gas inflation and QE would only make that worse, it would also make input costs for manufacturers worse. How does this lead to a rebound in manufacturing and thereby an increase in employment? The only way would be to make US goods (exports) cheaper, but as we already saw in Japan as a response to QE, other countries Central banks will fight back so their currency doesn't rise killing their own manufacturing/exports.
This brings us back to Warsh's comments, "The F_E_D seemed to panic", also saying that perhaps the F_E_D knows something we don't, essentially using employment as a front for something far worse? What could be far worse for Bernie who served during the Lehman debacle when things went south so fast that the F_E_D was being told by Investment bank CEOs that GE and AIG were on the verge of collapse as the Financial system froze up, GE seemingly had very little to do with the Financial crisis, but because they relied on financing to make payrolls they were only about a week out from major trouble. AIG would have been catastrophic. So is the F_E_D panicking about something that they don't want to call attention to and create a self-fulfilling prophecy? Along those lines, have you looked at Goldman Sach's price performance the last few days vs say JPM?
Again, this isn't proof positive of anything, but just take a look at GS, other than price action alone, the underlying action seems to raise some questions, even if we only look at the post-F_O_M_C data.
GS since the June 4 market bottom (from the May 1 decline) and the 60 min chart.
A closer view of the 60 min chart since the F_O_M_C.
While there are lot of common sense questions about QE and employment (one of the most obvious is that there's no proof that QE has ever helped employment), there's no doubt that QE has helped banks. In fact I would be willing to go so far as to say QE was a direct replacement for Lehman-like intervention by essentially giving the banks free money, during the QE periods, almost every investment bank reported they didn't have a single day of trading losses during their earnings reports while QE was in effect. "If" Goldman had made a call and let Bernie know that they were in serious danger, Lehman like danger, that would almost certainly prompt an immediate response from the F_E_D and one that was opaque using something like employment as a front, if they came out (again, GS trouble is hypothetical) and said they were doing this because of problems at financial institutions, then it would create the same credit freeze we saw in 2008, the same panic, bank runs (both retail and institutional) and create a self-fulfilling event. Another curiosity is the fact MBS were the chosen asset to buy and who holds MBS? The banks.
I don't want to keep stating this is hypothetical as that should be obvious, but I do want to give you at least some information that may lead to some of your own questions and insights.
I pointed this out last week, although the absolute real reading wasn't there at the time, I showed you the recent rate of Change in the SKEW index which is offered by the CBOE and is put together using dat from options. Last week I pointed out the rate of change in SKEW was suggesting something was up and the index would be heading in to troubled waters, since then it has continued to do so.
SKEW's long term average kept by the CBOE (although they just started publishing it last year) is 115, when SKEW rises above that level, it indicates a higher probability of a "Black Swan" market event or a sudden crash. Last time we saw SKEW rise we called it way before it reached it's peak , again based on the rate of change, March was the market highs and when we started building the core short positions.
Here's the recent change in SKEW since I pointed out the increased rate of change last week.
The VIX is still in a zone of extreme complacency, which is normally a bearish reading associated with market tops...
On August 17th the VIX closed at 5 year lows and from there peaked on September 4th, over these 12 days the S&P-500 was basically range bound, it actually lost nearly 1%.
However the VIX reading by itself doesn't give the entire picture of market sentiment, complacency or fear.
The bottom window is the forward premium over the historical, the VIX Risk Premium is higher than what the VIX absolute reading would imply, the higher the indicator in the bottom window, the more concern or fear there is among traders.
Above I mentioned the "Hedge Fund" component... You have heard me quote the statistics that only 11% of hedge funds are outperforming the SPX, there's really no reason to pay the incredible fees associated with a hedge fund such as the 1.5%-3% management fee every year and another 20% (typically) up to 50% in performance fees, the fund makes 20% and gets to keep 20-50% of your gain as an incentive fee, it makes no sense if the fund can't outperform the SPX when you can buy a Vanguard SPX fund with none of these fees and get better performance than 89% of all hedge funds out there.
Well that number just changed for the worse, as of now- ONE MONTH LATER, the percentage of hedge funds outperforming the SPX is only 8%! With all of their technology, expert networks (a legal word for inside information) and hot shot managers, 92% are now doing worse and some much worse than the SPX. I mentioned as Q3 comes to a close, some funds allow quarterly redemptions although traditionally it has been at the end of the year; this means any funds underperforming and expecting redemptions must sell holdings and usually profitable ones to meet the redemption call. When John Paulson's Flagship Advantage plus fund (this is one of the hottest managers on Wall Street-or was) lost over 50% of the fund in 2011, of his top 5 holdings, only GLD was profitable, look at GLD during from November to December 29th (redemptions taking place the first days of January), there's little doubt that Paulson sold huge amounts of GLD to meet redemptions.
Whether Q3 redemptions will be significant or not, we'll know soon, the largest fund holding being AAPL.
As for Friday's trade, here are a few charts of interest that show a market that seems to be looking to move in different directions, both intermediate and short term-the long term charts are another story altogether. I'm giving a few examples rather than dozens as they serve the same purpose, they show how the market seems to be more broken up and as I theorized last week, we would likely be in more of a stock pickers or industry pickers market than the more conventional, either risk on or risk off.
However there's no separating the numerous events that took place on Friday from normal signals given, in fact there's probably no way to understand the many different ways all of these events individually and taken together influenced the market, when it comes to hedges, rolls and the re-balancing of a major index and every derivative product based on the index, the follow through trade will clear up where the market really stands. If in fact it becomes fractured, I have a feeling it won't last long.
This is the 5 min chart that went positive several days before the I-Phone 5, the 5 min chart has deteriorated, but as I have said, I'd like to see a clear leading negative divergence as we saw in white on accumulation.
AAPL 1 min Friday was all downhill in 3C and once it started leading negative, the was it for AAPL holding up.
Meanwhile in BIDU which I recently closed the core equity short and seemingly at the perfect time, Friday's action looked much different.
A closer look at BIDU Friday, not the normal risk on/ risk off action in the market.
GS on a 15 min chart looks like some of the trouble I showed on GS 60 min charts above, but Friday was different...
Even as GS fell in to the close, the short term 1 min chart looked pretty good, there is a significant gap above.
In one of the simplest demonstrations, the Q's vs the DIA...
QQQ late Friday positive in to falling prices, however beyond this 1 min chart, the 5 min chart and other longer charts did not look so good.
The DIA didn't look good at all on the 1 min chart, nor longer timeframes.
DIA 10 min.
Toward the EOD slide on Friday, commodities held better than the market, in fact the averages for commodities actually gained a bit. The market was selling off more than the Euro, but the $AUD was more in line with the market's decline. Credit broadly was selling off with the market, High Yield Corporate Credit actually performed worse than stocks as did Junk credit by blowing through their lows, strictly High Yield though diverged from credit and the market and performed fairly well in another sign of dysfunction. Yields performed worse than the SPX.
So I am very interested to see how the market reacts and moves this week, if it moves together as it almost always does or if it fractures which will be a nightmare for most traders. It's one thing for BIDU and AAPL to look different, they are in very different places price wise, but when two major averages look different, even on short term charts, that's another story altogether.
One description of Friday's late day action (and this may be significant because it was late day when almost all options expiration activity is already completed) was called,
"A case of small doors and large crowds into the close today (S&P futures ending 1 point above F_O_M_C-day close)".
S&P Futures closed at their lowest level in a little over a week with the downward momentum carrying in to the after hours.
Stocks however were visibly off toward the late afternoon, this wasn't just in price, but in underlying trade as well as you'll see with some example charts. However, despite the volume, the late day sell-off and the underlying trade in certain assets, we can't fall for the long time technical assumption that heavy volume and selling=Panic selling. I think most of us by now have seen how price can be very deceptive, however given the nature of the events on Friday and some other things we'll touch on, we also shouldn't assume there weren't some other things in play, especially in the hedge fund space which I will get to.
Given the QE3 announcement, conventional wisdom would expect to see the $USD lower on dollar debasement expectations, however (and this is just pieces of the puzzle, not conclusions), the $USD has been out of character even with the trend before QE3 was announced (again, no conclusions, but the pre-QE-3 dollar action is consistent with QE3 being priced in to the market).
Even if that theory was shown to hold water ( and perhaps even if it isn't shown to hold water), I do have a gut feeling there will be wide dispersion between industry groups and stocks within them.
For instance, if we look at the 4 major average (the Dow-30, SPX, NDX and Russell 2k) during different QE programs (1 , 2 and Twist)...
The averages are color coded and I added the Dow-20 Transports (DJ-20)
QE-2 era starting with the Jackson Hole speech that effectively served as notice.
Since late August transports were moving directionally with the rest of the market, although at severe relative under-performance, but recently (again I think it has more to do with manufacturing data, but that may not be all) transports have fallen apart.
It should be noted that the Economic Surprise Index since about Jan 2012 to present has gone from +1 (positive) to -11 (negative), meaning the economic data has surprised to the downside quite a bit. In fact, as the SPX moves to 2012 highs, the Eco-Surprise Index has moved to lows below all of 2012, all of 2011 and about 1 or 2 points away from 2010 lows. I know this is hard to visualize, but since 2009 when the Economic Surprise Index hit lows of about -33, the Index has actually been in an uptrend, eventually moving in to positive territory early this year. While the current -11 is nowhere near as bad as the 2009 lows, it is the first time since those lows that the trend in the indicator has made a lower low, thereby breaking the uptrend since 2009.
This chart should give you a better perspective...
If the move lower in transports does have anything to do with QE-3 being announced (visually it looks like it does), my guess would be that it comes back to the problem if manufacturing contraction, the fact that end demand is low and input costs are high, debasing the dollar in both previous versions of QE has caused strong inflation in commodities and there's the catch 22 that I mentioned during Bernie's press conference on the day QE3 was announced, the market had a noticeable reaction when he was asked about whether a rise in inflation would cause adjustments in the program and through the veil of F-E-D speak, Bernie essentially said yes. If manufacturing is in decline and further decline is expected, then the price action in transports makes perfect sense as they are the end of the line.
Just from my own perspective and then later voiced by former F_E_D governor Warsh, something doesn't seem to sit right with the intended goal of QE3 and the reality of it being announced now. Warsh said it looked like the F_E_D was panicking in an environment that didn't warrant panic. From my own perspective after correctly visualizing the holes in EU policy actions as they were announced, it seems simple: If the F_E_D's goal is to lower unemployment with QE3 (and recall that the goal was stated as "lowering unemployment within the context of price stability") which is half of their mandate, the other being price stability, it makes no sense whatsoever to introduce QE3 that is not sterilized (meaning that doesn't create more money out of thing air, rather than sterilized in which the money supply remains constant). Manufacturers the world over are seeing a decline in orders, they have stock on their shelves and as a result they aren't using their manufacturing capacity and are letting employees go; in addition their input costs are rising due to inflation. Debasing the dollar makes purchases more expensive, savings are worth less, prices for every day consumer goods like gas and food are higher. Manufacturers need consumer demand, but consumers are already feeling the pinch of food/gas inflation and QE would only make that worse, it would also make input costs for manufacturers worse. How does this lead to a rebound in manufacturing and thereby an increase in employment? The only way would be to make US goods (exports) cheaper, but as we already saw in Japan as a response to QE, other countries Central banks will fight back so their currency doesn't rise killing their own manufacturing/exports.
This brings us back to Warsh's comments, "The F_E_D seemed to panic", also saying that perhaps the F_E_D knows something we don't, essentially using employment as a front for something far worse? What could be far worse for Bernie who served during the Lehman debacle when things went south so fast that the F_E_D was being told by Investment bank CEOs that GE and AIG were on the verge of collapse as the Financial system froze up, GE seemingly had very little to do with the Financial crisis, but because they relied on financing to make payrolls they were only about a week out from major trouble. AIG would have been catastrophic. So is the F_E_D panicking about something that they don't want to call attention to and create a self-fulfilling prophecy? Along those lines, have you looked at Goldman Sach's price performance the last few days vs say JPM?
Again, this isn't proof positive of anything, but just take a look at GS, other than price action alone, the underlying action seems to raise some questions, even if we only look at the post-F_O_M_C data.
A closer view of the 60 min chart since the F_O_M_C.
While there are lot of common sense questions about QE and employment (one of the most obvious is that there's no proof that QE has ever helped employment), there's no doubt that QE has helped banks. In fact I would be willing to go so far as to say QE was a direct replacement for Lehman-like intervention by essentially giving the banks free money, during the QE periods, almost every investment bank reported they didn't have a single day of trading losses during their earnings reports while QE was in effect. "If" Goldman had made a call and let Bernie know that they were in serious danger, Lehman like danger, that would almost certainly prompt an immediate response from the F_E_D and one that was opaque using something like employment as a front, if they came out (again, GS trouble is hypothetical) and said they were doing this because of problems at financial institutions, then it would create the same credit freeze we saw in 2008, the same panic, bank runs (both retail and institutional) and create a self-fulfilling event. Another curiosity is the fact MBS were the chosen asset to buy and who holds MBS? The banks.
I don't want to keep stating this is hypothetical as that should be obvious, but I do want to give you at least some information that may lead to some of your own questions and insights.
I pointed this out last week, although the absolute real reading wasn't there at the time, I showed you the recent rate of Change in the SKEW index which is offered by the CBOE and is put together using dat from options. Last week I pointed out the rate of change in SKEW was suggesting something was up and the index would be heading in to troubled waters, since then it has continued to do so.
The VIX is still in a zone of extreme complacency, which is normally a bearish reading associated with market tops...
However the VIX reading by itself doesn't give the entire picture of market sentiment, complacency or fear.
Above I mentioned the "Hedge Fund" component... You have heard me quote the statistics that only 11% of hedge funds are outperforming the SPX, there's really no reason to pay the incredible fees associated with a hedge fund such as the 1.5%-3% management fee every year and another 20% (typically) up to 50% in performance fees, the fund makes 20% and gets to keep 20-50% of your gain as an incentive fee, it makes no sense if the fund can't outperform the SPX when you can buy a Vanguard SPX fund with none of these fees and get better performance than 89% of all hedge funds out there.
Well that number just changed for the worse, as of now- ONE MONTH LATER, the percentage of hedge funds outperforming the SPX is only 8%! With all of their technology, expert networks (a legal word for inside information) and hot shot managers, 92% are now doing worse and some much worse than the SPX. I mentioned as Q3 comes to a close, some funds allow quarterly redemptions although traditionally it has been at the end of the year; this means any funds underperforming and expecting redemptions must sell holdings and usually profitable ones to meet the redemption call. When John Paulson's Flagship Advantage plus fund (this is one of the hottest managers on Wall Street-or was) lost over 50% of the fund in 2011, of his top 5 holdings, only GLD was profitable, look at GLD during from November to December 29th (redemptions taking place the first days of January), there's little doubt that Paulson sold huge amounts of GLD to meet redemptions.
Whether Q3 redemptions will be significant or not, we'll know soon, the largest fund holding being AAPL.
As for Friday's trade, here are a few charts of interest that show a market that seems to be looking to move in different directions, both intermediate and short term-the long term charts are another story altogether. I'm giving a few examples rather than dozens as they serve the same purpose, they show how the market seems to be more broken up and as I theorized last week, we would likely be in more of a stock pickers or industry pickers market than the more conventional, either risk on or risk off.
However there's no separating the numerous events that took place on Friday from normal signals given, in fact there's probably no way to understand the many different ways all of these events individually and taken together influenced the market, when it comes to hedges, rolls and the re-balancing of a major index and every derivative product based on the index, the follow through trade will clear up where the market really stands. If in fact it becomes fractured, I have a feeling it won't last long.
In one of the simplest demonstrations, the Q's vs the DIA...
Toward the EOD slide on Friday, commodities held better than the market, in fact the averages for commodities actually gained a bit. The market was selling off more than the Euro, but the $AUD was more in line with the market's decline. Credit broadly was selling off with the market, High Yield Corporate Credit actually performed worse than stocks as did Junk credit by blowing through their lows, strictly High Yield though diverged from credit and the market and performed fairly well in another sign of dysfunction. Yields performed worse than the SPX.
So I am very interested to see how the market reacts and moves this week, if it moves together as it almost always does or if it fractures which will be a nightmare for most traders. It's one thing for BIDU and AAPL to look different, they are in very different places price wise, but when two major averages look different, even on short term charts, that's another story altogether.
