I'm not going to make the entire case for all of the analysis here that suggested the F_E_D was boing to back out of assets sooner than later 9while even the most cynical perma-bear website argued the F_E_D can never back out of QE as recently as this morning).
I'm just going to go over the bullet points of what I have been calling the F_E_D's "Slow boiling the frog" to their exit.
- September 13th 2012 the F_O_M_C announces QE3, however at 2:24 p.m. during Bernie's press conference, when asked what the F_E_D would do if inflation reared its head, Bernie said they "could adjust the pace of asset purchases" (paraphrased). This was the first shot, the market topped at that very moment after having a knee jerk move higher on QE3 being hauled out.
What became obvious was for the first time, the F_E_D was not giving the market absolute certainty.
- Next the F_E_D contemplated changing the yardstick and suggested that they may change the way they analyze QE, for the first time suggesting they may move away from calendar dates (which are about as certain as you get) and toward a model based on the economic conditions.
- Next the F_E_D did EXACTLY that, this is all part of Bernie's "guidance" for the market, but the market either didn't care or wasn't paying attention. This removed the hard dates that Wall St. could count on, "ZIRP will last this long, QE will be this big and last this long". If there's one thing the market hates, it's uncertainty, ESPECIALLY WHEN ASETS ARE THIS MARKED UP BEYOND REASONABLE VALUE.
EXAMPLE:
Compare bull market 2003-2007 to 2009-present.
In the first market volume was rising as it should for a healthy market, there was no asset purchases holding the market up, in fact consumer spending was strong because of housing values and almost entirely held the market up. Unemployment was low, there was no US sovereign Credit rating downgrade, there was no European, Chinese or worldwide recessions, unemployment was low and inflation was right at the F_E_D's comfort zone.
In the second market, it was entirely fueled by the F_E_D creating money out of thin air, savers were punished as their savings lost buying power, inflation was rampant causing manufacturing and other margin squeezes so bad it was killing earnings, gasoline hit all-time highs, The Debt Ceiling, the Sequestration and the F_E_D's perception (and reality) that Congress hasn't made structural reforms and is the most divided Congress in recent memory, The F_E_D's antidote to too much debt is creating more debt, unemployment has stubbornly persisted, consumer spending is nothing like the last bull, millions of homes have been foreclosed on, banks have become even larger and less stable (Too Big to Fail), Economic data has went down the tubes- not only in the US, but worldwide, we have recessions across the world, we have banking and sovereign country failures, on and on and on -and volume is falling. Everything is dependent on the F_E_D devaluing the $USD and buying our debt that China no longer wants.
Can you honestly say that asset/market valuations at all time highs are reasonable given economic conditions here and world-wide vs the prices seen during the first bull market that did not end well, but was very healthy while it was running? Perhaps now you can see why years of accumulated shares may have taken several quarters to be distributed and shorts set up.
I Digress...
- The F_E_D then started hinting that they may have to look at the size and scope of the current asset purchase program, the market kept whistling past the graveyard.
- F_O_M_C meetings took on a surreal quality, "We may but more, we may buy less" with no press conference to explain.
- Hilsenrath, the unofficial mouthpiece of the F_E_D from the WSJ (If you don't believe me, tell me how he analyzed the minutes and typed this pice precisely 3 minutes after the release of the minutes?) made the case on a Friday after the market closed that trimming of QE was coming. The market still ignored.
- I think we knew a long time ago, in fact I started making the case September 13th, the F_E_D realized they had a huge balance sheet that would be painful for the market and economy to unwind and they weren't getting any tangible results from asset purchases other than blowing asset bubbles. If you think this market is not a bubble, please email me and explain why, keeping in mind the last bull market's conditions vs this one's.
So what spooked the market today?
Maybe the fact the F_E_D speakers (5 this week so far) sounded very much out of character, some sounded downright afraid and some admitted they were afraid. Ex-F_E_D governor, Kevin Warsh gave us the F_E_D's problem last September, "QE is easy to get in to, exiting policy accommodation has always been the painful part" and we have unprecedented policy accommodation, not even the F_E_D knew what to expect because if they did, we would never have seen QE2, they expected a rebound long ago.
Some suggest it was the disconnect between what Bernanke said this morning and the other F_E_D speakers and more importantly, the lack of consistiency between his prepared comments and the Q&A portion of his testimony today and most importantly the disconnect between everything Bernanke said today vs. what the actual F_O_M_C minutes said. As I said this morning, the minutes will have the most credibility.
Or...
“A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting"
Perhaps it was F_O_M_C members going on record in the minutes, saying they were concerned about the bubbles in US Financial (stock) markets (paraphrased). More dangerously for the QE IV-dripped market may have been this...
"One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability."
Essentially for the first time ever, an F_O_M_C member went on record saying the F_E_D was intentionally creating assets bubbles, which up until the April meeting had been a cost/analysis benefit as described by Bernie himself in Congressional testimony, "The Russell 2000's gains are creating a wealth effect" LOL! For the banks maybe, that volume isn't declining since 2009 because more retail is coming in to the market with their 401k's and IRAs.
I can almost guarantee who this member was, none other than QE critic, Richard Fisher.
Perhaps it was all of it. Does it matter?
What we saw today was the best example of a "1-Day Key Reversal".
The fact the market hit an all time new high today makes the 1-Day Key Reversal even more Picture Perfect. The day should close below the lows of the previous day. We also call these "Outside days" and sometimes "Bearish Engulfing Candles", but this is more specific and more damning.
A little Factoids for you...
The S&P and NYSE saw the highest volume in a month, something which fits well with a Key Reversal Day.
The Dow was up 155 points today, then closed down 80 points, losing 235 points from the high with the Dow and SPX both hitting all time new intraday highs, before giving it all back and then some (again perfect Key Reversal Day). The NASDAQ hit a 12.5 year high and saw the worst close in a month on the same day.
High Yield Corporate Credit, HYG, saw it's biggest decline from intraday highs in 6 months and as the market starts to see more "real supply/demand or rather Fear/Greed", as I have mentioned, we are seeing some of the first real technical patterns in years based on actual fear and demand. For instance, HYG's flag was manipulated to help the SPX last week, I've proven that much to you, today's move is the first real flag pattern I've seen based on real trading supply/demand (as noted recently, we have seen this in TLT and VXX).
A true bear flag? It could have been even worse if HYG wasn't accumulated 5/13-5/15!
I like this one...
The last two times the S&P 500 hit all-time high and closed down more than 1% from that high were 10/11/07 & 3/24/00
That's a fact!
As for longer term divergences, I don't show these charts often because people have a hard time believing them, but perhaps some attitudes are more willing to consider the data and the concept of "Reversion to the mean"
You already know about the Macro0data which I recently said will be more and more important.
I showed you this last night, Dr. Lumber vs the SPX as the new leading indicator replacing "Dr. Copper"- not that copper isn't negative as well...
Yields and the market have always shared a relationship in which they move together, I don't think, "This time it's different", I believe in "reversion to the mean".
SPX (green) vs. Yields (red)
You know about channel busters...
That's quite an ES retracement and on volume...
Russell 2000 Futures are even worse, this is what I was warning about in going long when you know there are so many red-flags. This is just a warm-up, but we can easily lose a month's gains with a single gap opening.
TF put in the high and low for the time period today and on volume.
How about the $USDX?
That's another breakout new high for the $USD. As I said and as we are now seeing more frequently intraday, "The market can't ignore the $USD forever"
Some may not agree the Yen/SPX correlation is quickly becoming one of the most important now that the Euro and AUD have failed, the $USD is important and increasingly so too.
It's hard to argue with the reversal areas today.
I noted several changes yesterday afternoon, the reach for protection in VIX futures was one of many...
Of course you remember the VIX Bollinger Band Squeeze that I thought, well it's well known, it tends to create a highly directional move-interestingly it's tight ranges as well where we see accumulation and distribution, perhaps the Bollinger Band concept now has a literal reason why it works...
We noticed this a few days ago, also noticed it's been getting tighter than the last two squeezes (remember the market and VIX move opposite each other).
I already showed you the stop run on TLT and reminded you that a head fake move is often the last thing we see before a reversal, this afternoon after that stop run that saw the highest volume of at least this year, we saw accumulation in to the afternoon flat trading range, where we often see accumulation. Apply Bollinger Bands to TLT in the right timeframe and you'll see them pinching as well.
This led to two positions opened today, TBT Puts and TLT Calls.
Then there was this which we already knew about, FCT as a sentiment indicator vs. the SPX...
As for credit, High Yield just dumped today after having gone negative last week.
This is ES vs. HYG, HY and IG Credit.
I wondered if HYG would bounce at support of the flag, it sliced right through, but that's what I'd expect before a bounce any way as a head fake move, even for a silly bounce from here-the stops have to be hit.
I do expect some bouncing, probably tomorrow. I'd guess there will be some sellers who came home from work to this mess tonight putting in orders to sell on the open, we did see the divergences starting, but as I said, this is emotional warfare, the market will want to shake off any new shorts, they aren't getting a free ride that easy.
The SPY divergence isn't that impressive and even if it builds, if can't compare with the damage done today.
Look at the 60 min chart, it may seem unreasonable in the negative divegrences, but remember where market breadth went south, right in this same area, more stocks were moving down than up-that takes distribution.
As for futures tonight, I'm not making any predictions, but thus far NQ and TF don't look very good.
In Japan tonight, on the open JGB (bonds) futures were halted right on the open as they dropped to 2-year lows, if you don't recall, this was to be one of the signs that the BOJ's aggressive QE failed.
We'll play the set ups sent our way, I think we have a few good ones today, we'll be looking for more.
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