Leading Indicators...

Last night in the "Daily Wrap: NOT THE SUMMER DOLDRUMS" which was a continuation of Tuesday's "Daily Wrap: The Summer Doldrums?" the first two paragraphs read like this...

"Last night's "Daily Wrap" somewhat rhetorically asked if we were in the "Summer Doldrums" a period of very dull trade during the summer, but I haven't seen it in years. The Doldrums literally feel like you're on a sailing ship at sea in the hot, humid summer sun with ZERO wind, just sitting there...waiting for something to happen.

However as I said last night, "... the market looks like it's in true summer doldrums, but I'm not sure I believe that is what we are seeing.... I suspect it's something a bit more serious."

One of the concepts that is true in so many scenarios is that of, "Changes in character lead to changes in trend"."

Obviously the changes in character were not the Summer Doldrums as so many have speculated the last week.

This still leaves us with the possibility/probabilities of a bounce (which as explained last night becomes more and more unpredictable the further we get in to the big picture because just like AAPL's 300+ point/ -45% decline, at some point someone in the hedge fund herd decides "He who sells first, sells best" and like AAPL, we have a stampede of panic with everyone trying to fit out the same small door". However making things worse this time is the amount of leverage in the market and we haven't truly seen what a market decline looks like with the dominance of HFTs providing market liquidity as they are not obligated by law to do so like market makers and specialists. In rallies HFTs provide a very narrow bid/ask spread, but in a decline, they can shut off liquidity in an instant, making that much harder for longs to sell their positions and as I have said, "Who are they going to sell to? Smart money has been selling to them all year, they aren't taking the shares back up here and volume has dropped off  to what is only a level in which I think it will be looked back on as one of the main culprits of a decline. LIQUIDITY AND VOLUME ARE NOT THE SAME THING. Sure, market makers and Specialist have to make a market even in a decline and take the other side of the trade if it's at market and there's no willing participant to take the other side, but this doesn't mean they have to offer anything approaching a reasonable spread.

In any case, along with the F_E_D's 45 page report released this week about how leveraged ETFs and their re-balancing in a decline are likely to exacerbate it to unknown, but terrible proportions, this is just something else to consider.

Until we get to that bridge though, which I'm happy to see our core shorts performing at approx. a beta of 9 (9% gain today) I know that's not the correct term, but I think you understand, for now it's about where we are going and how we want to play it. As I said yesterday during market hours, "Until we have solid confirmation, I'm on the sideline"

So lets look at Leading Indicators to see if there's any clue and then again at the close.

 The SPY Arbitrage is moving to the positive side, now near +$.40 SPY, this is sort of significant because as you might recall from our analysis of the carry crosses, the opinion was the following...

"as for an engine, it's hard to imagine a carry cross doing the work, especially the $USD/JPY, maybe the AUD/JPY, but as you'll see, the JPY has some 3C strength that would make any carry cross driver difficult."

The fact that the AUD didn't look like it could overcome strength in the JPY as of last night and the $USD looked even worse, the carry crosses like USD/JPY that had been carrying the market until two days ago when the AUD/JPY took over, all looked like they'd be shut out due to Carry trades being closed as was evident in JPY performance and 3C charts, that leaves one other probable mechanism which is the SPY Arbitrage (maybe AAPL for the Q's) and we see the SPY Arb. moving up.

HYG, one of 3 parts of the Arb is outperforming today which is likely part of the reason the Arb is positive.

And TLT is weak today so that's helpful to the SPY arbitrage.

 (VIX intraday vs an inverted SPX) As shown earlier, even though VXX is higher on the day, its 3C charts look like near term weakness is most likely so if VXX falls that improves the SPY Arbitrage.

 Junk Credit tends to trade very similar to HYG, the leading in JNK vs the SPX today is interesting, I'd like to see it at the close.

Yields are like a magnet, the scaling here isn't great because Yields were leading on the move up on the 13th so they'd be even higher now, considering they have a magnetic-like pull on the SPX, their positioning looks bullish for the VERY short term market.

 Commodities have also made quite a turn-around with excellent relative performance today, largely due to PMs.

A little $USD weakness has also helped intraday.

I'd say this is far from definitive, but the short term character is starting to take on more and more confirmation since the first charts this morning of 1 min positives only.