The Week Ahead

I'm going to try to keep tonight's post brief, while I rarely go out of my way to look at other' analysis as I don't even subconsciously effect my own, I do have respect for Peter Worden and his Father Don, I've met both several times and they just have a good nose about the market. As I updated TeleChart, the nightly Worden report is the first thing you see and the title grabbed my attention, not much else in the report did except the last line...

" I'm willing to sacrifice what I believe to be limited upside potential from here in order to be well positioned for the eventual downturn."

I couldn't have said it better myself so.

Instead of going through chart after chart and stat after stat, the major themes developing are as predicted and it will be those I briefly touch on.

As you know I predicted we'd see increased daily ATR, a much choppier market and increased volatility and beyond simply saying that, our trading strategy reflected that foresight. Instead of buying options when I think appropriate, that are a month further out in expiration than I think I'll need and fairly deep in the money (a very conservative options position), we started using weekly options, in some cases buying 1 day before expiration, usually holding 1 to 2 days and doing very well with it as we traded both calls and puts. The increased volatility and ATR as well as the choppiness were brought up and predicted before they started as being signs of a top/reversal, but "Taking what the market gives" and using the right tool for the job made a lot of us a ton of money in a market that is otherwise acting like a meat grinder.

The Russell 2000 is a great example of the low volatility and ATR that raised bullish sentiment to extreme highs and brought retail back in to the market, there wasn't so much as a correction, what I called a very "Friendly, dumb money environment", now the increased ART, volatility and choppiness provide a great opportunity with the right tools (trades), however even as the daily ATR and moves feel like the market is making some big moves, it's clear to see really not much is happening, it's a lot like churning (handing off of shares by smart money to dumb money before a reversal).

While stocks have been largely lateral in the newest trend, other risk assets that should lead or at least rally with the market, have been clearly much less optimistic, for example, High Yield Corporate credit, (even though I suspect an oversold bounce coming ), this is a divergence that is never a goo sign for the market.

"Credit leads, stocks follow"... Although this is but 1 highly liquid example, High Yield Credit has been much less optimistic about the state of the economy/market, it held in there, even leading the SPX at times, but just before the stock market volatility picked up, Credit began selling off to the point where it has now taken back all gains since the New Year.


CONTEXT has been showing the same thing in the futures...

ES futures (to the right in red) don't have any support from other risk assets as the CONTEXT/ES model (green) shows other risk assets to be much less enthusiastic.

One wonders were these dumb money, bullish sentiment extremes are coming from.

US Macro-data has been horrible and this during the "easy to massage macro data" seasonal adjustment period, if in fact the data is being massaged as it was this time last year before the adjustment period ended and the market went lower with all 9 of our core shorts making double digits within 2 months with no leverage, then I hate to think what the macro-data will look like about a month from now and it's not just the US with our first negative GDP print in years, but Europe and not only Europe, Germany in particular also with a negative GDP print, leaving both countries 1 negative print away from a recession.

As pointed out last week (especially in the context of the possibility of currency carry trades turning south quickly), the $USD has seen it's biggest weekly move higher in seven months (not only a market negative, but endangering the highly leveraged carry trade with dire consequences for the stock market).

In the week ahead, we are already seeing changes, a trend continues until it doesn't, as we say, "The trend is your friend until the end when it starts to bend", luckily we are looking at data that tends to precede the price trend and shows us what smart money is doing in underlying trade and it's especially useful when it contradicts price movement, like I say, "Price is deceptive".

The one theme I think is crucial this week is that of the Carry trade in currencies, it's highly leveraged (up to 200 to 1 so even a 1 pip move can be disastrous) and it is the funding of choice for most hedge funds, when the carry trade needs to be closed, they need to sell the assets first(like stocks) especially if the currencies moved quickly and put their position at a loss, so the basket of carry trade currencies will be key to pay attention to, we already see changes.

 As I said last week around this time, "Something will have to happen in the EUR/USD", Draghi didn't cut rates to knock the Euro down and keep Germany competitive, but he did everything else he could to knock it down in the post-ECB rate decision press conference, it seems to have started to work and this is clearly a market negative.

 The open of FX for the pair so far this week is uneventful.

 Here's the trend of the $USD/JPY, it's not so much the $USD strength until more recently, but the Yen's weakness, the Yen being a key carry currency, this flattening out is more indicative of JPY strength building than $USD weakness, so this is a powerful chart to jeep an eye on as it can hold dramatic and very fast consequences for stocks on the downside.

 The open this week isn't too exciting, but continues with that bias to the downside or at least, "The trend starting to bend".

 The EUR/JPY carry has been market positive for most of this chart, again, the trend is starting to bend at the end.


 On this week's opening FX trade, it is similar to the USD/JPY, more about the Yen than the $USD or EUR and that will have carry traders worried, if this isn't already a sign of the trade being unwound.

 ES/SPX futures are leading negative on the open in 3C for the new week so far, even though it's very early and all the really key markets are closed, it's still not a good sign, worse yet...

 The 5 min chart which was instrumental in our short term weekly option trade success and more indicative of the underlying flows is also leading negative for SPX futures.

 NASDAQ 1 min 3C futures for the new week are leading negative, but again, more importantly...

The 5 min chart is leading negative.

Even though HYG looks very oversold and has a positive divergence that looks like it could bounce, I agree with Peter Worden that the upside trades now (as the quick options call opened Friday and closes shortly after the same day, look limited and not worth the risk, I'd rather be using the time to do Spring cleaning with profitable longs and establishing or filling out short positions on price strength and underlying weakness.

Many times when we are early in a volatile reversal, the reversal itself is not plain to see until after the trend has emerged, you just see a lot of large volatile chop, but don't see the edging lower of the market within that chop or market breadth. This is one of those moments where there are still short term opportunities to make big gains, but you have to be careful not to get lost in the lines.