Daily Wrap

Lots of interesting stuff today, I'll try to stick to the most important.

The things that stand out most to me would be Treasuries and yields and the deep divergences in Leading Indicators, they are at the point now in which I have ZERO doubt about the fate of the market and I have NEVER seen them this bad.

Overnight the Nikkei saw volatility as it's volatility has picked up in an insane way, about a month's worth of bullishly parabolic gains were taken out in 3 days, today it lost all of its gains and just popped at the EOD to close green, much like the SPX today. I believe Japanese JGB futures went limit down again on the open to halt trading. The BOJ is to meet with traders of JGBs to try to come up with a purchase schedule as the Yields are out of control which is what I said the day the BOJ unveiled their QE, "JGB Yields will determine whether the BOJ lost control or not", so far they have. There was some BOJ lip service that "easing will put downward pressure on yields", but where's the beef? Apparently the BOJ also engaged in "Price Keeping Operations " in the market today via the banks as proxies buying up ETFs. Speaking of the banks, with all of the JGBS (a market with a notional 4x larger than equities) on their balance sheet, they effectively have ticking time- you know whats.

It was my contention in the articles linked at the top right of the member's site, "Currency Crisis" that the BOJ did lose control and everything we have expected has played out thus far.

The incredible Yen/SPX correlation continues, I pointed this out back in April, but I didn't realize that it was building in intraday trade to, now to the point the SPX vs the Yen (green) looks like this.

 There's obviously an inverse relationship there and as I showed you last week, the Yen looks to have bottomed, as soon as it made a head fake move it shot higher, today it was under control no doubt due to the BOJ, but if this divergence in the Yen (positive) and correlation with the SPX keep up, well here's what the Yen positive 3C divergence looks like.

 Yen 4 hour 3C divergence close up showing last week's rounding bottom, the head fake move in yellow followed by the reversal as we often see after a head fake to run stops-also note the 3C positive divergence through the rounding bottom which we called perfectly.

Zoom out a bit and you have this...

 A huge 4 hour Yen positive divergence, if the Yen follows this (and you know I have thought it will since the BOJ announced their massive QE that doubles the monetary base in 2 years)  and the SPX correlation keeps up, the SPX goes the opposite direction.

The Yen 1 min intraday is in line right now, but this 5 min leading positive suggests that the Yen will explode higher within a day or so, perhaps tomorrow which won't be good for US equities.

The real asset to watch is the USD/JPY carry pair, the BOJ would like it to hold at $100, but if the Yen jumps as I suspect it will, it will sink well below 100 to the pleasure of China and the G20.

 Tis is the pair's 4 hour 3C chart, I never see divergences on pairs this far out, and it's obviously very negative making it look very difficult for the pair to hold $100 at which point I think the BOJ has to admit they lost control.

The 5 min chart also looks like the Yen, as if it will see downside in the next day or so, again not good for the market, here or there.

European markets were in a different mood, here's the European Top 100

What was it? Perhaps Hungary's Hungarian National Bank cut their main rate by 25 bp to 4.5% after having already cut it 100 bp this year. This makes the 5th Central Bank rate cut in May; Israel cut on Monday.

Speaking of which briefly, Russia is to send ground to air defense systems while Israel says it will target any such equipment coming in to the country and the US and France draw up plans for a no fly zone in Syria setting the stage for a Russian, Israel-US showdown as the Russians have the biggest naval fleet in  the Med they've ever had within the last few weeks.

The excitement in Europe couldn't have to do with the fact that Spain will miss all official budget deficit targets, this stuff, especially PIIGS and even core EU nations' sovereign Yields will be more and more important along with the Macro-data I warned of about 2 weeks ago.

Treasuries were the big news of the day and I think spooked traders, the normal correlations were no where to be seen and there were a lot of risk assets selling off hard, in fact all, equities, commodities, credit, bonds while the $USD and Precious metals were relatively bid.

What  sent 10 year yields to the biggest move since 2008 and the highest close this year? It "seems" to be the 10 a.m. Consumer Confidence number as seen below...

This is somewhat farcical as CC beat at 76.2, well over the high end of consensus at 74 and above the previous at 68.1.

At the same time we had the VERY farcical Richmond F_E_D (which accounts for a little more than 9% of U.S. GDP)...

The prior was -6, consensus at -3 and actual at a beat of -2, but what is comical and no one ever digs behind the algo scanning headlines, is that despite this beat, sub indexes such as New Orders fell to the lowest reading since January; Employees went negative; the Average work week fell to the lowest level since August 2012 and Wages are nearly the lowest in a year, but the F_E_D needs the yardstick to read "positive" so they can justify backing out of QE which is exactly what I said they'd do last year when they changed the yardstick from a solid, unambiguous Calendar date, to an easily manipulated "Economic data" such as above.

Even the algo scanning computers couldn't do much with this and for all those POMO people who think nothing changes, look at what happened to the market after today's POMO ended around 11 a.m.

After 11 a.m.,  the big POMO didn't seem to do anything for the market. There's no doubt POMO has been used for the last several years to create this equity bubble, but the F_E_D in their own words from the April F_O_M_C minutes openly admitted they created a monster and now fear the repercussions. This is partly why I think the PPT is not working to keep the market up, but rather to manage the destruction.

What equity bubble you ask? Besides the obvious of comparing the 2005 economy, employment and consumer spending as well as SPX levels to the same now, we also received notice from Morgan Stanley that the top 1500 U.S, companies have seen their net profit margins decline since June 2011, in fact, they have declined EVERY SINGLE QUARTER since then. If it weren't for Stock Buy-backs, the situation would be even worse so we have 2 year lows in net margins/corp. profits.

Take that with today's after market NYSE announcement that NYSE Margin Debt is at all time highs, meaning more investors than ever are leveraged, while at the same time investor net worth has dropped to the lowest reading on record!

But I digress as I have a tendency to stray a bit...

As I was saying, 10y Treasury Yields are up the most since Oct. 2011 and closed at April 2012 highs.
This now puts T. yields higher than the SPX's dividend Yield... Hmmm...

This is TLT vs the SPX (green-Remember all leading indicators are compared to the SPX in green unless otherwise noted).

In red we saw a negative divergence that seemed like they were intentionally sending TLT lower, this is positive for the SPX, you'll note at the same time HYG was being accumulated for the market run in yellow, HYG moving up is another lever that helps the SPX move up on short term manipulation (the 3 assets are TLT, HYG and VXX). Remember this time period when you see HYG Credit. However the plunge in yields is pretty amazing, do to Consumer Confidence? I don't think so, but that will most likely be the CNBC line although I don't listen so I don't know.

 TLT intraday today vs the SPX, there's some semblance of an inverse correlation as they normally move, but the SPX didn't tag new highs and TLT tagged new lows-even if just on an intraday basis.


Yields vs the SPX

 Yields are actually positive, remember Yields act as a magnet for the SPX so we could very well get our remaining bounce tomorrow with Yields up here vs the SPX.

Here would be a more appropriate comparison on a 15 min chart, Yields are begging the SPX to make that bounce, TLT is in line to help, even VIX futures as well as currencies, but beyond the immediate intraday trends, there's lots of trouble.

Take credit for example, we say, "Credit leads, stocks follow" because the credit markets are much better informed.

 When I said I had no doubt the market's fate was sealed, take a look at this "Leading Indicator's" divergence-this is what we look for in reversals, HYG (High Yield Corp.. Credit-the most liquid kind) is at an enormous negative divergence vs the SPX, we have seen decent 10% reversals on divergences 10%  this size.

 Intraday on a 2 min chart, HYG was accumulated at the white box, I showed you at the time, I predicted it would move higher to help the SPX (arbitrage) and that it would be sold in to every chance they get at higher prices, I also showed you that last week. Now go back and look at the same timeframe in TLT, it was used to send the SPX higher last week as was HYG, the selling in to any HYG strength is more than obvious even without 3C as it made a new low.

 Junk Credit that trades amazingly like HYG put in an end of day positive divergence, you can even see it in price. In fact both HYG and JNK put in positive divergences so I think they try to help tomorrow with a continued SPX bounce, but it's one I want to sell in to / short in to with new urgency as I see these Leading Indicators, including the $USD and Yen of course.

High Yield Credit...

 That's the kind of divergence vs the SPX that spells HUGE trouble, this is part of the new urgency to get out of longs and fill out short positions.

Today's market didn't have enough gusto beyond the open to move emotions, I suspect it tries again tomorrow, I want to use that to fill out all remaining short positions for the longer term.

 HY Credit intraday, even as the SPX bounced EOD, HY Credit sold off even harder-it's also less liquid so they need to get out and only so many can fit through the door at once.

This is an example of a 5 min positive divergence at the EOD today in HYG, I have 1, 2 and 3 min positives as well in both HYG and JNK so they should at least give it a shot, I'm ok with having added to HYG today, but I wish I had sold the position from Friday right on the open where the momentum is.

Other charts...

 This is a market Breadth chart showing the Percentage of all NYSE stocks trading above their 200 day moving average, note 81+% back in January, you'd think this breadth indicator would rise with a higher SPX, but in fact we have more stocks falling below their 200-day m.a. which is a basic way of determining a stock's trend, this would be bearish. The recent decline has been somewhat stunning considering the market, if this doesn't tell you smart money is moving out and handing the potato to retail, I don't know what will-these are real , hard numbers. There's no interpretation here.

 FCT as out sentiment indicator went "RISK OFF" very clearly today, but more importantly...

The Trend of this leading indicator vs the SPX, this is the negative divergence or dislocation we look for, I just have never seen one this big and that attests to the extreme nature of the market I have been talking about which I think will have a bad outcome.

The market has been extreme to the upside, but the market always acts like a pendulum, it swings way too far one way and then way too far the other, I think it has been very extreme on the upside and the pendulum is just about at a dead stall before head ing the other way.

 The $USD didn't have much of a correlation with the SPX or commods today, but look above at how tight the Yen's is.

 The VIX as I pointed out a week or so ago has seen a Bollinger Band Squeeze which means a highly directional move is coming, the last two broke to the upside, this one is tighter and already started an upside break-remember the VIX and market move opposite each other.

 VXX, VIX short term futures is remarkably in the pocket of the normal correlation with the SPX intraday, however...

 The VXX and VIX's failure to make new lows as the SPX made new highs shows traders have been bidding up protection, this is some of the first true demand without manipulation I've seen in years. It wasn't that long ago that the VIX was making 7 year new lows as the SPX moved higher, now both have solid support from real demand for protection.

Sector rotation today looks like a risk on day except the Healthcare sector. I suspect this will look different soon.

So as mentioned before the close we go in to tomorrow with positive divergences in place, I'll be looking to unload longs/ calls in to price strength and set up shorts and fill out existing partial positions.

Strangely the ES CONTEXT model looks very bullish for a day up tomorrow, take a look-OI think this is so skewed because of treasuries decline.

We have almost a 20 ES point positive Es model, again I think its skewed by the decline in treasuries, but this should help get our move in the market tomorrow.

As for futures right now, I showed you and told you about the Yen, USD and USD/JPY which are the main players, short term they are on board for a bounce tomorrow, after that they get REAL UGLY.

ES and TF (SPX and Russell 2000 futures) both have a small 5 min positive divergence, NASDAQ 100 futures are in line on the 5 min charts. The intraday / overnight charts show ES and NQ with large positive divergences, here's SPX futures, but NQ looks the same.

Es 1 min 3C chart.

Of course the 4 hour ES trend/3c makes clear what's been going on during this "extreme market", there's always a reason and as I always say, "Price is deceptive" and for those who say "Price is all that counts", well in a market like this you can easily see 3 months of gains taken out on an opening gap.

As the SPX was set up with TLT, HYG, Yen etc to make it's extreme move higher, look how smart money used higher prices... I trust the divergence is MORE THAN CLEAR.

If anything pops up while I'm awake I'll let you know, otherwise unless there's a stampede, we should be set for tomorrow, it will be analyzing the market and shifting positions quickly that will then become the challenge which is why I have been building positions in advantageous areas in advance.