Broad Market Update

As you know this week is very thin volume, today is historcally one of the thinnest days of the year which makes it easy to move the market, remember how Cramer could move a stock as big as RIMM back in its heyday with what he called as little as 8 million spread out through options exchanges, that use to be the time when a stock would be the fulcrum of the market daily, we lost that a long time ago as everything went correlation 1.0 with the F_E_D, either risk on or off, no rotation.

If there was a fulcrum stock yesterday it would have certainly been AAPL upon the news of the completion of a 6-some odd year negotiation with China Mobile, that was supposed to have been concluded last week, but apparently wasn't until the weekend, still it's old news and the market discounts this, even as we see a retail chasing pop, the big players in Chine discounted this information immediately and continued to do so as it developed, they don't wait for the news to come out. In fact the entire market is a discounting mechanism that isn't and hasn't been working well for the last several years, although there are signs with all of these Hindenburg Omens and stocks below their 200-day moving averages that the discounting is happening in market breadth which has been horrible, as one of the larger Hedge Funds said about 2 months ago, "We've been selling everything that's not nailed down for 15 months now", that's not something they can lie about as it's really easy to check their quarterly 10-Q and yearly 10-K which discloses all of the positions they entered or exited with a few caveats (that's what caused the AAPL crash, Third Point having AAPL as a top 5 holding and then their 10-Q came out and AAPL was missing causing the herding Hedge Funds to all try to fit out the same small door at once as they follow the leader, Dan Loeb). Additionally market breadth shows the same clearly as I have posted numerous times.

Speaking of Market Breadth, even though yesterday's volume was EXTREMELY light, market breadth was improved on a day to day basis. The Carry Trades were nowhere to be found yesterday so it was AAPL and an extremely aggressive Arbitrage (SPY Arbitrage was positive +$.80 which is quite a bit, accomplished by jacking HYG and knocking VXX which I suspect is seeing some end of year unwinds that may (as they often do) accompany a long position unwind as protection is no longer needed as the long is unwound.

Still I had a gut feeling yesterday to wait on filling out trading positions even though we had the typical and still do, 5 min leading negative divergences in the Index and early VXX signals that were building, good thing we waited, patience is truly undervalued in trading.

The 5 min divergences such as The Russell 2000's...

 This is the kind of divergence we've had a lot of success shorting in the trading portfolio or options portfolio.

These are now making their way to 15 min charts which is much different and more serious in Index futures than it is in the market averages.

 The pivotal NASDAQ 100 futures from yesterday seeing a strong 15 min leading negative, this wasn't part of my gut feeling yesterday, I didn't notice this until later.

In any case, price is doing one thing yesterday on a low volume, Arbitrage induced melt-up while underlying action is doing something quite different.

As for pre-market today, the intraday divergences were and right now, are working perfectly, interesting because this is rarely seen pre-market other than in a long overnight divergence.

Yesterday was also a bit unique in it's very tight range, all the gains came from the overnight melt-up, there weren't much to be seen during the trading day.

This daily candle of yesterday's close is called an "Evening Star" and it's perfect from a candlestick p.o.v., it also happens to be a downside reversal candlestick formation as the intraday range is flat creating the star or Doji body of the candle.

The Dominant P/V was useless considering the volume, it couldn't come in as anything other than Price Up/Volume Down which is the most bearish of the 4 relationships, but again with the seasonal volume factor, it's hard to say this is a useful metric. I believe the most important metric right now is End of Year Window Dressing which should end Thursday with the Trade+3-day settlement rule.

This doesn't mean there weren't interesting things to be found in breadth such as Consumer discretionary Stocks / Leaders under-performing quite badly with WAG, WFM, SWY, HSY, CAG, PG, KMB and AVP all down on the day yesterday and none have made a new high with the market.

Speaking of Consumer discretionary, yesterday some Christmas data was out: Black Friday all in all posted a 4% decline. Then the first two weeks of December both saw double digit declines in sales, the last and final week saw a 3rd consecutive double digit decline in sales and was down 21.2% on a Year over Year basis.

However there are funds that need to survive the year with the average performance well below the SPX's yearly return, this is make or break as the new enrollment comes in January or redemptions. So with no carry pairs working, HYG and VIX were the mechanism along with AAPL/Tech.

HYG's 15 min chart though doesn't look so hot heading in to the close of the year, short term manipulation (especially on extreme low volume) is easy, but this is a bigger trend or exodus and you have seen the yearly divergence which is quite sharp since May.

VIX was Whack-a-Moled, it seemed rather sudden, but it was nonetheless which gave the SPY an $.80+ advantage of its $.97 gain yesterday.

Thus far this morning it looks like they tried to start the Arbitrage mechanism, but so far have failed which is surprising. VXX saw a gap down this morning, but is already seeing stronger signals than early yesterday which was one of the things I was waiting on, we'll see how they continue.

As I mentioned better breadth yesterday, it still leaves only 53.85% of all NYSE stocks trading above their 200 day moving average, up from 52+% the day before, but well off the 82+% earlier in the year.

The Spot VIX, despite being banged, still maintains a rounding bottom as a new low was not made.

I'm fairly well convinced this bullish set up is not going to fail.

Forgetting about VIX Futures 4 hour leading positive which I've never seen since following futures with 3C, the Spot itself has a very strong daily positive which have tended to work very well.

Daily 3C leading positive in spot VIX.

If the market was as strong as some think it feels, this VIX chart would be trading well below the lower Bollinger Band and rightfully at new lows on the year.

I mentioned some weakness I saw developing in the Nikkei 225 futures, that has grown, take a look (this is Japan's equivalent of the DOW, they are roughly the same size in terms of points/percentages).

This leading 5 min looks like it's already effecting the Nikkei 225, I'd like to short this if I had a good vehicle.

Gold which has been trading opposite the market looks more and more like it has found a toe-hold...

 Gold Futures 15 min, I also saw something in silver yesterday which is my LEAST FAVORITE asset.

While we're at it, perhaps the oil consolidation is ending as the 15 min looks more constructive than it has recently.

One of the other curiosities I looked in to was what was assumed to be a fat-finger trade in the Sunday overnight trading action in the long bond as a large block was put out driving the long bond up from 130 to 135 almost instantly, I do not think this was a fat finger trade.

The 5 min chart shows the details, a little accumulation which may have been a primer or a trade and then the instant 5 point move overnight in thin volume which was sold in to, however there's another accumulation period as the long bond dips, it's quite interesting, I'm not sure what the game is here, but something is happening in which there's a bit of an illusion likely at work. In the words of Cramer, "Never do anything remotely truthful".

The carry trades are of interest, one of the most used over the last 5 years has been EUR/USD, not lately as much, but I could look at the pair in the morning and tell you where the market was going to open, it was like the EUR/JPY now or how it behaved recently as the correlation is broken now. 

Interestingly BOFA has a lot to say this week on carry type crosses although this isn't the biggest, it revolves more around the Euro, at least their warning which comes on the heels of their disclosure they are out of the USD/JPY,  they just warned on the EUR/USD. HOWEVER, I FIND THE YEN MORE COMPELLING...

As far back as April this year my opinion was the Yen would rise as the market fell which was not largely based on the closure of carry positions, but now it is more so.

A CARRY TRADE IS AN EASY WAY FOR A FUND TO LEVERAGE UP THEIR AUM, BY CLOSING THE CARRY THEY ARE ESSENTIALLY WALKING OUT ON THEIR LEVERAGE AND UNLESS JAPANESE RATES WERE ABOUT TO RISE WHICH THEY AREN'T (at least not by the BOJ's consent), A RISING YEN INDICATES THE CARRY TRADE IS BEING CLOSED AS THE LAST THING TO BE DONE IS TO SELL THE FIRST OF THE PAIR (EUR) WHICH BAC JUST WARNED ON AND BUY BACK THE YEN WHICH HAS A STRONG POSITIVE DIVEGRENCE THAT STARTED EXACTLY AS THE FOMC HIGHS WERE HIT.

So from here we will see what the market does on this, traditionally the lowest volume day of the year with an early closure at 1 p.m. for everything but NYMEX which closes at 1:30 (this is not the NYSE).

Watch China in the coming days, they just conducted a symbolic 7-day repo (liquidity injection), but yields only dropped on the 7-day repo briefly before going on to hit 9%, well above the seasonal highs seen in the past that have to do with banking regulations in to the close of the year.

What I'm saying is the interbank lending system is breaking down like it did in the US circa 2008 around the failure of Lehman as no one trusted counter parties because no one knew who had what exposure to sub-prime.