Daily Wrap

What a crazy day, I just finished about 2 hours or email replies as I has mentioned earlier in the day that I likely wouldn't have time for emails today.

In any case I find a number of things fascinating, first this post from yesterday, "DESPERATION" which chronicled the ridiculous amount on manipulation used through out the day and even in premarket that we chronicled (probably close to 20 different levers were used from credit to rates to volatility, currencies, carry trades and finally outright buying just to move the SPX up a meager +0.25% to close at a "New SPX All-Time High" which I mentioned earlier with sarcasm, a 0.25% move to a new high, what a victory.

The larger point was the intense selling pressure they must have been facing to have to use all of those levers, each one documented in yesterday's posts, to get a one quarter of one percent gain! I also mentioned the activity in the VIX Futures as well as TLT in which they had more demand for protection and a flight to safety the last couple of days and what happened last time that happened which was first written about in, "TLT and VXX, Real Organic Demand, Real Supply and Demand, Real Fear and Greed". The bottom line when I posted that on April 12th was the natural correlations had been destroyed, there was so much demand for protection (bidding VIX futures) and demand for a Flight to Safety Trade (Treasuries) that it was making VXX and TLT behave in a way few people probably noticed, but it had severe consequences as the very next trading day the SPX was down -2.30%, the Russell 2000 was down nearly 4% (3.78%) in a single day. We saw the same activity late last week and early this week, after yesterday's embarrassing performance, it's little wonder the Russell 2000 was down nearly -2.5% today.

The afternoon session was very fast paced as I showed you, there were few signals suggesting we should close our Puts and shorts (did anyone notice our long position in AMD was up +14.18% today and nearly +30% since we opened it?), but I noticed a lot of small things like 5 min 3C charts that should have been destroyed that looked much better than they should, I noticed that HYG (High Yield Corp. Credit), even though it was down significantly, started showing better relative performance late in the day, prompting me to check the SPY Arbitrage model to find exactly what I expected to see...

The levers of short term manipulation were being pulled and it made more sense to me to sell our Puts in to downside momentum rather than a possible lower low tomorrow, but with no momentum and likely lost upside gains. 

Later I also noticed that the Context model had changed significantly from the noon-time post when the ES model's differential was 21 points lower than ES. From about 8 a.m. to this afternoon's lows, guess how many ES points futures dropped? About 16.5, again, pretty close. I didn't see the CONTEXT model until after the close, in fact just several minutes before I started this post, take a look...

Note that by the 4 p.m. close CONTEXT was at parity with ES, I had not seen this, but if I had, it would have just reinforced my feeling we should take profits on the puts and shorts as more and more small clues piled up.

One of the early clues (and by early I mean after the F_O_M_C and after 3 p.m.) I noted that prompted me to check the SPY Arbitrage model was, as mentioned, HYG's relative performance in the afternoon.

You already know how negatively dislocated HYG was today from our "Leading Indicators" post earlier, but what you probably didn't see was HYG failing to make lower lows with the SPX, this is why both the SPY Arbitrage and CONTEXT models improved, the relative performance completely changed and not just there; Junk Credit did the same, High Yield Credit did something even more noteworthy, one of our sentiment indicators improved in to the closing hour, Treasuries made a notable move, Yields, currencies and other Leading Indicators improved. Here are a few examples.

TLT also seems to have been one of the levers (it is 1 of the 3) as it would normally be making a higher high as the SPX makes a lower low, especially from fear if not just from the correlation.

Yields were off big time earlier in the day, but the relative performance in to the closing hour was better.

 The Aussie definitely dislocated on the open, but was rangebound in the afternoon, actually providing a stabilizing environment.

The Euro found a floor rather than heading lower

The $USD started the day lower, but the afternoon trade was more interesting, range bound, more bullish for stocks than what it's legacy arbitrage correlation would be doing, moving up.

And most impressively, High Yield Credit not only had a floor all day, but actually made higher highs in to closing trade.

Even relative sector performance had clues if you paid attention with Financials Tech and Discretionary performing better in to the close while the safe haven sectors of Staples, HealthCare and Utilities bled off in to the close.

These indications alone were enough for me to realize something was up and to use the momentum to get the best prices on the puts today, however there were other notable events such as a couple of our late day new positions.

 Take GOOG's chart for instance, not only positive divergences, but responses from them. Do I think GOOG pops higher +2% tomorrow? Probably not, but we are entering exactly what I've been warning of, INCREASED VOLATILITY and these moves are going to be exaggerated on the down and upside.


GOOG's 5 min chart with migration of the positive divergence.

The IWM's intraday that had been improving almost all day, I'd say someone was accumulating a rather large position in to the weakness for a nice average price that can be unloaded a short time later at a nice profit.

Do I think this could change the leading negative divergence on this 60 min IWM chart? "NO!" However, if we can continue to trade through these reversals, the volatility will make our trades increasingly more valuable, stops just need to be wider, position sizes smaller and you have to understand what to expect, extreme moves and a higher degree of unpredictability.

One of the reasons a few days ago I said, "I'm not backing up the truck to load it with shorts yet", was because I have an expectation of what leading indicators and 3C should look like. Today we got a big head start on what leading indicators should look like, volatility in the market, even if its range bound with a high ATR, will only help to create what I expect to see, here's a sample...

I'm not sure how volatility in the market will play out, but lets just assume a wide range, I expect to see leading indicators like HY Credit continue what was started today and diverge vs the SPX, as you saw in today's LI Update, many are already at some of the largest dislocations I've ever seen, but I don't recall seeing a top of any size since we've been using leading indicators that didn't diverge, I don't expect this to be any different.

Also two of the key assets to watch are going to be the $USD and the Yen, if you don't know why, make sure you read my 2-part "Currency Crisis " Post. (the link has both articles linked). The Yen is a probable black swan very close to bringing the house of cards down.

You know what I think of the F_O_M_C statement, the thing is we noticed this as a trend at least 3 months before anyone talked about it by observing the market carefully, especially during the press conferences after the F_O_M_C which conveniently wasn't there today because I don't think Bernie himself could rationalize the policy statement without causing total panic.

I'll update futures in a bit.