Daily Wrap

First we have the BOJ Policy meeting going on today and tomorrow, so we have the results of that coming which decimated the JGB futures sending them limit down numerous days, what impact it has is unknown, what they do is unknown, but there's a feeling out there that they went too big, they lost control.

Of course after 4 F_E_D speakers this week so far with some highly unusual comments, we have the fifth tomorrow morning at 10 a.m., The Bernakanator himself. Is it just me or does it seem like there are a lot of F_e_D speakers this week pre-empting tomorrow's 2 p.m. release of the minutes from the last F_O_M_C meeting which was strange any way, "We could buy more, we could buy less", even though they have been slow boiling the frog since announcing QE3 to condition the market that less will be coming sooner than later.

This bit is boilerplate, whenever there's anything F_E_D related like a release or policy statement I always warn (because it's always there), "Beware the knee jerk effect". We see it so often that it's pretty much a mainstay, that could be useful immediately or it could be something to keep in mind, but if you go back to a F_O_M_C meeting from 3 years ago in the archives, you will see I warn the EXACT same thing EVERY TIME.

I saw something interesting today so I thought I'd bring it to you. You've heard of "Doctor Copper" before? In essence the direction copper takes is a leading indicator for the economy/stock market.

 This is Copper in green vs the SPX.

If you are still going on about Doctor Copper, then you probably took a few years off from trading, don't get me wrong, I think it is still useful, especially on the macro economic side, but Copper has been replaced by, "Dr. Wood". It seems wood futures are a much better sign post of economic and stock market activity.

Along those lines, here's Lumber futures vs the SPX in purple on a daily chart since 2009.

 Remarkably, Lumber follows the SPX pretty well, in 2010 it actually was a leading indicator and warned of the downturn before the SPX hit it.

Now take a look at the daily chart of the same two assets...

 Whoa! What happened here to lumber? That's pretty ugly and just for kicks I took a look with 3C, unfortunately I can't get enough history on TOS to properly scale the two, but the divergence is clear.

3C was in quite a negative divergence at the top of Lumber's run and is now leading it lower.

Now remember last week I said, "We're going to have to pay more attention to Macro-Economic releases"? That's because any feeling in the market that the F_E_D is "ify" on QE or cannot be counted on to backstop the market, the market will front run like it did in QE1 and QE2 (market declined well before either ended), but in this case it "could" be worse because the market doesn't have calendar dates to reassure, things can change any moment and with index multiples like we have, Macro-data I believe will play a much larger role in reducing risk and bringing prices to a less "Disconnected" state with the real economy.

Keeping that in mind, take a look at Dr. Lumber vs the US Macro Economic Data trend.

Hmm... Pretty interesting in my opinion.

As far as today goes, the market struggled, what else do you call a +0.05% close in the R2K?

Again, as as has been seen for the last two weeks very acutely if you pay attention, risk is sold, safety is bought. I didn't see anything that really ring my bell today, other than that increasing trend. Even if you don't have 3C or any indicators at all, it's plain as day on a price chart when comparing a risk and non-risk asset. This may be the first time in over a decade I've seen real support caused by real demand and not just some manipulation of technical tradewrs' expectations.

Here are a few examples...

 Yields weren't playing along as Treasuries weren't playing along. This is a leading indicator because if you have a risk on sentiment, then money is coming out of treasuries and going in to stocks, why sit in treasuries that barely move when you can be in stocks that have much better beta? And when treasuries fall, yields rise, that's why the two usually move together and when they don't, equities tend to gravitate toward reversion to the mean of yields.

If you saw (and you probably have), the longer term disconnect between the two, you might raise an eyebrow. We'll see more when we get to TLT.

However it wasn't just a bid for the safety of treasuries at work today, most of the entire risk asset class was going the opposite direction and considering the SPX only closed up 0.18%, these 12 ES points suggest the risk assets were really being sold, not just trailing behind.

CONTEXT for ES (SPX futures).

 The VIX Futures saw some early manipulation, it would seem that way, I'll show you why next, but they bounced right back as traders bid up VIX futures (protection), the 1 p.m. climb in VXX along side the market is a type of oxy-moron, risk is on or risk is off, the only way you can have both is if one is being manipulated or retail is going one way while institutional is going another.

Note the SPY arbitrage goes from supportive to less so and negative around 1 p.m.

Here's what I mean by, "You don't need indicators to see support" as the VIX futures would be moving lower on a risk on move, they have support because they are bid.

It wasn't so long ago that the VIX was making 6 year, then 6.5 year , then 7 year new lows as the market went higher, you probably recall; that has stopped.

 TLT-Treasuries were bid all day as well except for some early shenanigans off the open, the last hour or so is the normal correlation we are use to seeing, the market heads down in to the close (and what happened to the EOD ramp on a Tuesday that was going for 19 of 19?) and Treasuries rise as they are bid as a safe haven, the only problem is they were bid all day.

You may recall toward the close it looked like TLT was going to pullback with 1,2 and 3 min intraday negative divergences that were strong, as soon as it lost a little ground positive divergences jumped right in and again, any weakness in protective assets was bought, while strength in risk assets was sold.

Example...

The IWM 5 min chart-by the way, for those using 3C or curious, this is the most typical development of a divergence, first a relative divergence to the far left, than a deepening divergence as it gets stronger (in this case the negative divergence) and then to the strongest divergence, a leading divergence which is seen very clearly in the IWM today  -actually before today, today was just VERY sharp. This happens on 1 min intraday charts, 5 min, 60 min and daily or 5 day charts, it's just the process.

The point is as TLT was seeing accumulation in to slight strength, IWM was seeing distribution in to slight strength, even without 3C you can see that by the IWM failing to make a higher high.

TLT vs. the SPX (green) saw TLT purposefully knocked down with divergences on the 16th, I've already showed you the evidence as the SPX failed to breakout of its triangle on Thursday. Note how TLT moves lower allowing the SPX to breakout of the next day's triangle, this is the arbitrage effect that is used in short term manipulation in HYG, VXX and TLT. However today TLT showed some nice resiliency.

 The VIX itself vs the SPY in red today saw some early weakness helping the SPY, then it was up, but even before the SPY started heading down off the intraday highs.

In fact the VIX closed up today, it normally closes down if the market is green-even light green.

However what is most interesting about the VIX chart is the continuing pinch in the Bollinger Bands suggesting a highly directional breakout in the VIX, I doubt it's to the downside with all the VXX accumulation and if to the upside, that's fear and that send the market lower.

The Yen saw a bit of the correlation in the afternoon that it has been showing lately with the SPX, that is why I think the BOJ policy decision and statement will be important for the market, it may not be 1.0 correlation, but it's a lot better than the Euro or AUD which use to be near perfect.

Note the Yen gains ground in the afternoon and the market loses it, the opposite occurred in the a.m.

Since 3C on the Yen was right on about the BOJ policy decision with a nearly 8 hour divergence before the announcement that was dead on, I'll be watching the futures for the yen and carry pairs closely.

This may not look like much of an inverse correlation between the $U?SD and the SPX, but the SPX has totally ignored the USD for months, only once the USD broke out above its base did we start seeing the market paying attention and showing some correlation, so that's something else to watch as the $USD looks ready to make a significant move higher. Remember, QE sent the $U?SD lower, if QE is withdrawn, slowed or unsure, the $USD stands to gain. I've already said numerous times that I believe the $USD base and breakout are directly tied to QE, in fact the base started right at September, the same time I thought the F_E_D was getting "ify" on QE, I'm sure smart money has better connections than I so the start date of the base and the F_E_D's change in language and posture correlate very well.

I'll be putting up the futures as well as a few other assets that I think might be decent trade set ups.

I like the lateral motion in Silver and Gold, it's a process that they need to undergo, but the lateral trade is part of that process.

I also really like USO short, I'll be looking for any opportunities that open up (USO strength) to look for trades there.