Daily Wrap

I'm going to try to start mixing this post up a bit more, show some different things and timeframes.

In any case, today's performance in the market was led by high beta/momentum stocks, after looking at the stats, those were what was in play as well as highly shorted names.

Lets just jump in to the charts.

Volatility because yesterday we saw some changes there and that's one of the 3 main asset classes that are used to ramp the market in short term manipulation.

Actually let me show you that first...

On the open, the arbitrage assets used to ramp the market were being used early, I mention this because of Volatility and Treasuries more specifically which are 2 of the 3 assets used.

Volatility... Yesterday volatility was key because it wasn't being allowed to be ramped and they did try specifically near the typical 3:30 ramp period, however volatility wouldn't move lower making it clear that protection was being bid in the VIX Futures.

 Here's UVXY just because it's supposed to track VIX futures a bit better, yesterday there was a base in, even the normal move lower due to correlation wasn't there, nor was the SPY arbitrage short term manipulation and in addition there were signs of accumulation, interesting. Remember the SPY Arb chart above that shows early manipulation? I think that's why the UVXY was as low as it was this morning, to help the market off the open, but then it refused to play along, not making any lower lows and hanging right around yesterday's close (yellow) despite the SPX closing higher.

 UVXY 1 min 3C chart shows what looks like market maker accumulation with accumulation at the lows and very small distribution adjustments just to keep the market from rising out of the accumulation/order fill range, which looks to be the same area as yesterday.

 The 1 min chart of the inverse of VIX, XIV shows confirmation in distribution ending with a leading negative low, it seems someone is preparing for volatility in the ETFs as well as the futures.

 The mid term which was the 4, 5, 6, and 7th month out in VIX futures was bid up even higher, above yesterday's close with a 10 min 3C leading positive divergence so this isn't about a short term roll in the VXX/VIX futures.

The Yellow area is the same early manipulation as above and in SPY arbitrage this a.m.

 The Mid-Term VIXM 10 min chart went from distribution to a leading positive divergence over the last 2 days.

 Here's the VXX (green)  with a Rate of Change Indicator, I often say a bottom or top is not an event, it' a process, and the price movement in VXX is very consistent with a bottom, how big is yet to be determined, but divergences are sharp.

 Here's the VIX, remember my VIX theory when we just had a triangle and pinching Bollinger Bands that went like this, a head fake and a strong mov up (this week) and then VIX to shoot up and the market down. We have what looks like a Crazy Ivan shakeout, both sides of the triangle.

a 5-day chart makes the shakeout of both sides more obvious, the next move I expected in the VIX was a highly directional move based on the tight triangle and pinching Bollinger Bands and to the upside.

Treasuries do today what Volatility did yesterday and today-Treasuries being one of the 3 assets used to manipulate the market short term, remember the SPY Arb chart on the open today...

 The long term 2 hour 3C chart of TLT shows a strong and recent flight to safety -I can say out of stocks and in to treasuries, despite the market, look at the breadth charts, it's clear the majority of stocks are seeing declines, that money is going in to the safe haven trade of UST's as well as European ones.

The white is areas of accumulation, red is distribution.

 Th closer 5 min chart showing a strong round of accumulation around mid-March which is about the same time the Trend Channel for the major averages was broken, TLT gaped up pretty high and we talked about this and how it was likely to be filled, but no negative divergences on the fill, just in line.

 Here's the SPY (green) vs TLT, the normal correlation is inverse like volatility, but today TLT/Treasuries did the same thing the VIX futures did yesterday, refused to move lower,we'll see why on the next chart.

Accumulation in March and the yellow area is the large gap that we thought would be filled, no distribution even on a fast 2 min chart, but the last 2 days as the pullback has been in line with 3C, it started going positively divergent, which sounds like the same reason VXX wouldn't make a lower low yesterday, protection was being bid, in much the same way, TLT was seeing the flight to safety it appears and these are 2 of the 3 levers to manipulate the SPX. So the last two days (besides the F_E_D fiasco) have been very interesting if you pay close attention.

"To make money you have to see what the crowd missed"

Transports, the former infallible and unstoppable group is no more... For most people who are vaguely familiar with the market, they are aware of the DOW Theory of Industrial/Transport confirmation even though the US is a services country now.

 Transports in the Trend Channel, recently stopped out, changes in character precede changes in trend. The Trend Channel self adjusts to each stock's own trading characteristics and builds a channel based on standard deviations, when it is broken, something big has changed and the trend is almost always over except for some unprofitable volatility that often follows laterally.

 Money Stream shows a longer term negative divergence in Trannies, but we are looking closer, specifically at this last run, which is the run I expected from my VIX/MArket expectations, it's just the first day with the lowest volume of the year and the algo ramp threw me, I expected stronger accumulation before the run.

In any case, MS is leading negative on this run.

Compare to 3C which was in line with the uptrend, but has gone very negative (distribution) recently and also leading negative on this last run, they are both money flow indicators, but both very different in how they work.

Gold and Silver...

 The Dollar / Precious metals correlation that use to be pretty reliable has been pretty screwed up with central bank policy and PM manipulation, but in recent days, the $USD in red seems to have the normal inverse correlation with GLD in the white areas.

 The longer term 60 min chart is why I think GLD has more upside in the near future.

 This is when we first saw accumulation in GLD on the 3ed, but I don't believe in "V" reversals generally so we gave it another day and the leading positive divergence at the lows on the 4th got us to buy 2x leveraged Gold and Silver ETFs, the distribution on the 9th was clear as day and we sold for about an 8% profit in 3 days. So far this chart is in line on the pullback so I don't think it is quite done pulling back, but I do think it will offer a long position soon for another nice run.

 The shorter term 1 min chart is where the positive divergence in to the GLD pullback will first show up, note the positives yesterday at the lows and very small negative divergences just to correct price, not to distribute shares and as it falls, the accumulation starts again. We need to see this divergence migrate to longer timeframes like the 5 min chart above, then we'll be close.

 SLV may have an even better longer term chart, note the head fake just before SLV turned down and then the accumulation, I hate trading these two so if I do, you know I really believe in them.

 10 min mid term shows the distribution, head fake in yellow and move down in to accumulation with a buy on the 4th and a sell at a negative divergence on the 9th again for a 3-day 8% gain. The current chart is inline so it's not bad, but likely still has some work to do.

The 3 min chart is showing accumulation in to the lows, you can also see the distribution very clearly on the 9th.  Again, I think we have more pulling back to do, the positive divergences should get bigger as we do.

Risk sentiment-FCT

 Since FCT is not correlated with anything but sentiment, the recent move this week seems to be losing the willingness to take on further risk, time-wise as described in the VIX/Market expectation, we are on track for the move up, next week's puts were for the move down (this week's calls were for the move up).

Interestingly if you step back a bit, something I need to do (I'm sure we all need to do) more often, FCT is showing an interesting divergence with the SPX, it seems risk sentiment is dislocating with the SPX.

Credit- "Credit leads, equity follows"

 This is HYG, it was moving along well until late January and it dislocated from the SPX, it has seen a move higher that I thought was a short covering move, I found it is something else, in any case, the 2012 Q1 negative divergence turned our non-leveraged shorts in to double digit gainers from May 1 to June 1, all 9 of them, the F_E_D's QE3 also produced a divergence and pullback from Sept. 13th and we now have another negative divergence, that's not a higher high in HYG since January.

JNK HY Credit is seeing the same thing.

As for recent activity in the Credit based ETFs, I found out it's because the banks are getting rid of real credit assets and ETFs are being used instead so they have seen massive liquidity injections. Here's an article and a few excerpts.


Exchange-traded funds that own junk bonds are attracting unprecedented sums of cash from institutional investors seeking to slip in and out of the market as dealer inventories decline

The two funds, which allow individual investors access to the junk-bond market for as little as $37.59 a share, are attracting buyers from Bank of America Corp. (BAC) to Northern Trust Corp. as primary dealers gut corporate bond holdings by 81 percent since 2007.

Dealer holdings of corporate bonds that mature in more than a year have dropped to $44.8 billion from as high as $235 billion in October 2007, according to data from the Federal Reserve Bank of New York.

Banks are reducing inventories as lawmakers worldwide set limits on risk-taking after the worst financial crisis since the Great Depression led to $2 trillion of losses and writedowns.

“ETFs have increasingly become a more viable way to express credit views,” said Eric Gross, a credit strategist at Barclays Plc in New York. “We’ve seen corporate bond liquidity go down across both investment grade and high yield.”

“As long as something like JNK or HYG is easy to trade and relatively liquid, I’m not sure why anyone would go through the hassle of chasing down all the bonds, unless they were very good at doing it,” said Chris Hempstead, director of ETF execution at WallachBeth Capital LLC in New York. “It may be an affordable way to get exposure to the bonds.”

So a lot of the activity in these Credit ETFs that seems strange is simply due to the huge demand to use them, basic supply and demand.

 As for the currency that tracked risk at nearly a 1.0 correlation, the Euro, it dislocated with the SPX pretty bad.

 Intraday the Euro showed weakness in to yesterday's highs as well as today's, there seems to be some correlation, you'd think $USD based, but today you'd be wrong.

 Here's the SPX (green) vs the $USD (orange), in white we have the normal inverse correlations, but when the Euro broke with the SPX it wasn't just because of Europe, the $USD broke as well, the correlation in red is the opposite of normal and will revert to the mean one way or another. Only the very recent run has seen USD's normal correlation as USD pulls back, interesting huh?

 The Yen, as long as it is heading down is good for the carry pairs, you can see the SPX moving up longer term, but...

What happened today? The Yen's decline should have helped the SPX push past the noon highs. Consider Volatility and Treasuries. Speaking of which...

 Yields / Treasuries are one of the 3 assets used to ramp the market, yesterday Yields moved up beyond the SPX, this is what I mean by, "They did try yesterday, but failed". Today Yields were lower, which makes sense with TLT's price and 3C action, this is less supportive of the market and more indicative of a flight to safety.

 The long term Yields vs the SPX were one of the indications telling us to get short in Q1 of 2012 as they went negative at the end of April, again after QE3 and the market decline and now they are severely dislocated from the SPX, look at price and Yields on a relative basis at the two yellow hashes. Yields moving with the market are good for the market, Yields failing to move with the market are indicative of a flight to safety, again you can't argue with market breadth readings, it's there.

Here's a more recent, but still long term dislocation between yields, failing to make a higher high for months and then leading negative

 Commodities are a risk asset and as such should move with the SPX, they did most of the week, but again, something happened the last 2-days

You might be tempted to say the $USD as commodities move opposite the $USD...

Here;s the $USD in blue vs commodities, it is moving down, that is supportive of commodities moving up.

Finally Relative Sector Rotation Performance.

 Over the last 2 days we have seen Financials fall behind, interesting with the XLF charts today, Basic Materials are where a lot of high Beta momentum stocks are, remember I said those were the leaders today? Note Basic Materials is in rotation today as well as discretionary. Also in rotation is the safe haven Staples and to a degree, Utilities. Tech was notably out of rotation-think yesterday's AAPL short/Put.

As for this afternoon, Financials fell off as did Basic Materials and Industrials. Rolling in where Utilities and Healthcare (both safe haven sectors) as well as Energy to some extent probably on the weaker $USD.

As for futures tonight, ES and NQ have REALLY bad 5 min negatives, these are the ones we had such a good run (something like 13 of 14 calls and puts on these signals with the only loser less than 3%).

One the 1 min, Russell 2000 Futures are leading negative in a big way, NQ is next followed by ES which is also leading negative below price.

I'll likely update futures before I turn in.

This weekend I'll show you some of the long term 3C charts.