Daily Wrap

Today is a really difficult day to write the daily wrap because there are so many moving parts that effect each other, I literally started gathering charts just for the FX side of the analysis and had 25 charts, that's not going to work.

The bottom line is pretty simple, the mechanics and relationships are the difficult part.

If you read and understood last night's post, nothing has changed in that sense, in fact that's what continued today.

Going back to May 1st, we closed a whole slew of Put positions in this post, Taking Profits in All Market Index Puts, Might Leave Some Long Dated Ones Open in fact there were 7 trades closed with 1 loss at about 7% and gains up to 80+% in short term put positions. There were a number of strange "red flags" as I called them that had me pretty convinced the market was going to bounce higher, in fact the same day we closed the Puts we opened calls in IWM and GOOG. I remember distribution in TLT (short term-not the longer term trend that's been going on most of the year) had me convinced that TLT was coming down, I've talked about this recently because I thought it was strange there was distribution in TLT, but seemingly to move it down not to actually distribute the Flight to Safety trade, I wasn't sure if it was gap filling or just going to be accumulated at lower prices. In recent days my view has been that TLT was being positioned for a move down because it opened up room for the SPX and several days later, the Dow to make new highs, take a look at the TLT distribution  and TLT vs SPX chart.

 After a distribution area in April ad a gap down that was accumulated, TLT bounced in to early May in to deeper distribution on this 5 min chart, May 1 was the day we had a crazy afternoon closing Puts and opening some calls.

The longer term (main underlying trend) of TLT as seen on a much more serious daily chart...

When a daily chart has positive divergence this large, there's a very serious flow of money in to the asset, TLT accumulated near the lows, even put in a head fake move below support and then moved higher.

The daily chart of TLT (green) vs. the SPX (red) looks like this...

Note the SPX was at resistance more or less on May 1,  the same day we closed all of our Index Puts which was also TLT's high. May 2nd TLT was a bit lower, the SPX a bit higher, but it wasn't until May 3rd that TLT moved down -2.36% and the SPX up +1.05% and a clean cut through resistance to make a new high. The Dow made $15k on 5/7, looking back it seems like these assets: TLT, HYG and VXX were clearly positioned in advance (such as short term TLT distribution to move it lower) to help the market as it has been fairly clear it has been struggling despite the headlines, does anyone really think today's +0.31% gain in the Dow on falling volume is a strong follow through day on an all-time new high?

As mentioned in a number of updates, both TLT and VXX (which you may recall was making new 7 year lows just a littler more than a month ago) have put in a floor and no matter how many head line new highs the SPX or Dow put in, the VIX and TLT just won't be driven lower (rightfully to all-time new lows taking the natural correlation in to consideration).

I don't want to go through and repost all the charts from last night's post, but clearly it is showing an almost panicky accumulation of VIX Futures (bid for protection) and TLT (which is the "Flight to Safety trade"), but it is at least worth a reminder without having to go through the entire post.

I used a 30 min chart for TLT as opposed to the 5 min chart above, the reason I did this was to show the extent of the recent positive divergence in TLT, a 30 min chart is a very large divergence, in addition it's leading (nearly to the May  2nd area) and has formed this large of a divergence in a mere two-days. The reasons the distribution at the red arrow is not as clear as the 5 min chart is because it wasn't strong enough to register on a 30 min chart, that's why I said above,

" I thought it was strange there was distribution in TLT, but seemingly to move it down not to actually distribute the Flight to Safety trade, I wasn't sure if it was gap filling or just going to be accumulated at lower prices. "

As you know, the stronger the divergence, the longer the chart it shows up on (migration of the divergence from shorter timeframes to longer represent a growing/stronger divergence), this is why the negative divergence doesn't show up well on the chart above, it wasn't that strong and wasn't meant to close a position, just to move an asset.

Numerous times today and in recent days, I've mentioned the relative strength in both TLT and VXX vs the SPX, so much so it seems the only asset to counter the pressure both were putting on the market (obvious from a Dow 0.31% follow through day with a lot of help) today was the 3rd of the 3 assets used in the SPY Arbitrage, HYG (High Yield Corporate Credit).

 This is the intraday Leading Indicator layout chart of TLT (light blue) vs. the SPX (always green in Leading Indicator charts unless otherwise noted) for today. It's not very common that TLT (20+ year Treasuries) and the SPX move up together, it's an oxymoron of sorts. Conventional wisdom is the market is either risk on or risk off with relative performance difference, but not Risk on (SPX moving up) and risk off (TLT, the flight to safety trade) moving up, it's more common for these two to have a nearly  mirror opposite relationship.

In the white box, there's some pressure on TLT as it is pushed lower from the 12:30 highs, in the orange box the strength in TLT is fading and in the green box it is moving as the normal correlation would suggest, however, with the SPX where it is, the normal correlation would also suggest that TLT would be near new lows for the year or lower, not a simple dip intraday.

I believe the reason TLT saw weakness in the area had to do with today's 10-year bond auction right around 1 p.m. that was weaker than expected and pressured the entire bond complex, that's around the same time TLT began to lose relative strength today.

As for the VXX (Short Term VIX Futures), the other asset that is bid up for protection, just as the VIX itself is called the fear index and rises when the market drops, it too prpessures the market when it moves up which is also against its natural correlation that is usually nearly the mirror opposite of the SPX..

 This is today's 1 min intraday chart of VXX (light blue) vs. the SPX (green as usual). From left to right, the opening downside in the SPX sent the VXX higher as is natural (in the green box), although you could tell from that first move that the VXX was moving higher than you'd expect. In the red box, again there's a flight toward protection as VIX futures are bid while the SPX also moves higher, again it's pretty much an oxymoron, the market is risk on or off, today it was both in both protective assets (TLT and VXX). At the red arrow, with the SPX where it was, you'd expect the VXX to be near the lows of the day, if not all time lows. At the green arrow with the SPX dropping a bit, the VXX hits a new intraday high.  Only during the last 30 mins or so does the correlation look normal in that green box alone, but then again with the position the SPX is in, the true normal correlation would be the VXX at or very close to all time new lows-wasn't happening.

So as mentioned today, both were putting pressure on the market, Capital Context's SPY Arbitrage model uses the 3 assets alone for institutional clients. Seemingly as there was another reach for protection and flight to safety the only asset of the 3 left was HYG (High Yield Credit which was seemingly used to help offset the negative pressure VXX and TLT were putting on the market.

HYG (High Yield Corp. Credit)...

 This is HYG which should move with the SPX under its normal correlation as being a High Yield product, it is considered a risk asset unlike the other two. In the White boxes HYG was actually showing better relative strength than the SPX, so it seems clear that to keep the Dow's follow through dat from ending in the red, the lever called HYG was being pulled.

However just because HYG was moving up, doesn't mean Credit traders were buying in to the risk on sentiment, in fact...

The trend in HYG as it has been used several times this week has been clear distribution-a leading negative divergence, HYG traders didn't mind HYG moving higher, they were either selling or selling it short in to price strength.

And just like that, the Dow's anemic follow through day looks even more anemic. As I have been warning the last week, in fact with greater frequency and seriousness, since March, the market is going to get more volatile, that's not just the ATR, but unpredictability and volatility in both directions. Two days before I warned to expect more volatility and where the market is, more unpredictability (I used AAPL as an example of what happens when the Hedgie heard starts to panic), we saw the SPX down 0.93% one day, up 0.94% the next and for all the volatility it was exactly unchanged at 0%.

 The other HY Credit was also weak in to the afternoon and selling in to the S&P's closing ramp.

 Yields should move with the SPX, when they diverge they tend to act like a magnet for stock prices, this is directly connected to the Flight to Safety in Treasuries as prices of Treasuries rise, the Yields fall.

These are the risk positive currencies that support the market, they are very dislocated from the SPX, but I've zoomed them in so you can see the intraday trend.

 The $AUD fell through the entire afternoon and especially during the closing ramp.

The Euro did the same.

When the Dow started it's End of Day (EOD) closing ramp, it was only 1 point above yesterday's close and in danger of closing red for a follow through day at all time new highs.

And the $USD has an inverse relationship with the market so when it falls it is supportive of the market as it did earlier and when it rises it puts pressure on the market.

As I had mentioned in a verbal update, the afternoon saw sector performance change a bit with Financials, Industrials and Discretionary (all risk on sectors) fading in to the close, while the safe-haven sectors of Staples and Healthcare saw better relative performance in to afternoon/closing trade.

I'll probably update the futures as well, but the bottom line is no different than last night's analysis,

"The obvious question is, "If Dow $15k is suppose to bring new investors in to the market, why didn't the multitude of SPX new highs (although Dow 15k sounds better) and the more important question, why are the professionals running away from risk? They aren't even hanging around for a little bit?"