Daily Wrap

As was noted Sunday, it's not the "week Ahead", but the end of the month as there are so many cross currents from market closures for holidays that fall in the middle of the week which are likely to cause some of the fatter Wall Street cats to take a week or more in the Hamptons rather than the typical 4 or 5 day weekend. Volumes were another issue, especially considering the above, today's NYSE volume was -20% less than the day after X-mas last year.

The T+3 Settlement rule and how it applies to the largest Window Dressing of the year, both Q4 and the end of year as well as tax trades and many others create so many unusual cross currents, it's almost like a week and a half of a.m. trade.

However we did find some interesting things today, not what I was looking for or expecting, but along the lines of what our read has been on certain issues.

Primarily is the question of whether the F_E_D's taper was a taper as retail traders seem to look at it or indeed tightening policy as I suspected Institutional traders would view it, meaning every time they slow the purchases or taper, Wall St. views it not much differently than a rate hike which has profound effects on the market. How do we know that?

I've talked about the market being up the last several days like Quad Witching and on strong economic news when the truth is, good news is bad news for the market. You'd never know that by looking at today's Initial Claims which blew consensus out of the water and made multi-year improvements, the market of stocks didn't reflect that.

This tells me that window dressing and year end performance are all ruling the market right now, and today Window dressing is largely over because of the Trade+3 days equity settlement, HOWEVER IT WAS APPARENT IN OTHER AREAS. 

The 10-year yield which is a benchmark that sets all kinds of rates from mortgagees to lending rates and more, THE ONE THING THAT SCARED THE FED THIS SUMMER WHEN THEY FIRST PULLED OUT THE TAPER TALK and they saw the 10-year yield gain 100 basis points.

Well today's strong initial claims didn't go unnoticed by the market as the 10-year yield nearly hit 3% at 2.9905%, just about as close as you get.

The 10-year yield hit that earlier this year and before that on July 25th of 2011 which was a great trading time for us as the SPX lost nearly -20%, that's right, the 10-year yield was the culprit (the same way in which it was when we asked, "What is the F_E_D so Afraid Of?") and it looked like this.

The 10-year crosses the 3% mark and equities fall sharply, I recall this era keenly because from early August to early October we traded every single 2-5 day swing up and down with leveraged ETFs and made over 90% while everyone else was getting chewed up in a meat grinder.

The point is this, today we received definitive evidence that the market is looking at the taper as a policy tool and it's not "Taper", it's tightening, it might as well be the same as a rate hike which is something that would really send the market in to a tizzy.

The VIX was smacked down hard on the open today, but recovered more than I thought it would, here are some examples.

 VXX short term VIX futures vs the SPX (green) with the SPX's price inverted, you can see the VXX start to outperform the correlation around 1 p.m.

Also around 1 p.m. a strong 10 min leading positive divegrence just came out of nowhere, it's not the kind of signal that I would act on immediately, but it is a hint of something that needs to be watched carefully along with some other assets. Remember Gold as well today as some charts were posted and how gold has been trading almost opposite the market with some strong positives in the area.

The real VIX futures (1 min) also saw accumulation activity in one of the flattest ranges I've seen in any asset.

 The VIX futures charts are positive in numerous timeframes (15 min above).

Why a lot of analysts think the VIX was specifically whack-a-moled, I'm not so sure. Why wasn't HYG pumped to activate the positive arbitrage? Instead HYG was hammered as predicted just before the holiday.

Another possibility would be long positions sold for whatever reason (tax or otherwise) and the VIX hedges that accompanied them were no longer needed. Even with TLT smacked down, there was no positive arbitrage, just low volume which they should have been able to move HYG, but it was slammed as well. As far as the algos read it, it's cash on the sidelines because it wasn't put to work in a risk asset, HYG. Thus no Arbitrage.

No SPY Arbitrage at all today. In fact the CONTEXT model looks nearly identical.

So what was a mover, I figure 3 things, LOW VOLUME (extremely low), WINDOW DRESSING's FINAL DAY and the Smack Down in the Yen which was very suspicious as the BOJ minutes contained Zip, ZERO, Nada in the way of surprises, EXACTLY as expected, yet the Yen was popped.

 This is Spot VIX intraday and that boost in mid afternoon that created a bullish daily reversal candle  right at the support of the lower Bollinger Band.

Here's the Daily Spot VIX, the BB Squeeze still evident, likely still in effect and a bullish Hammer Reversal candle as the closing candle with the lower BB as support.

About that Yen and this is one to keep a close eye on as mentioned the last couple of weeks (regarding the carry trades and the Buy back of the Yen to close them)...

 Yen 15 min whack-a-mole today, but a strong leading positive divergence.

The same on the 30 min chart. We saw these divergences last week and just a few days later Bank of America comes out and says they closed their carry in the USD/JPY which can be confirmed from their 10-Q/10-K so I doubt they'd lie about it. That means the accumulation we were seeing in the Yen was most likely that of BAC's and there are a lot more to follow.

Overnight one of the most interesting markets to watch after the Yen was purposefully knocked lower in low volume on what we can only assume was a reaction to the totally expected BOJ minutes release, but it may just have been coincidence is going to be the Nikkei 225 futures, the SHCOMP in China was down -1.6% while the Nikkei was up 1% so this is where my interest is in overnight trade.

 Nikkei 225 futures leading negative 5 min chart.

As well as the 15 min and the 30 min above, I'm thinking the Nikkei is about to join, especially since the BOJ didn't have anything more dovish in the minutes, what real reason does the Yen have to be lower other than to cover the carry at better prices?

As far as market breadth, if you looked at the headline breadth charts there wasn't anything of interest or use, it's what you'd expect, but if you looked more carefully, the indicators that represent the Percentage of NYSE Stocks Trading 1 SD and 2 SD Below their 40 and 200 day moving averages (4 indicators), all saw an uptick today, more stocks traded below all 4 groups of 1 or 2 standard deviations BELOW their 40 and 200 day moving averages, not what you'd expect to see today.

The Dominant P/V is pretty easy to figure out being Tuesday was a half day, volume has to be higher on a full day even if it is 20% lower than this same day last year (after X-mas). However what was surprising was the second or co-dominant relationship in almost every average was Price Down Volume Up while the Dominant was Price Up/ Volume Up, the co-dominance was a surprise and in the Russell 2000 the Dominant relationship was Close Down and Volume Up.

The Russell's behavior today was also surprising, it didn't take long after the 1 min chart that was in line all week to fall out and send the R2K plunging as the worst relative performer today after being such a strong leader earlier in the week.

As for TWTR, it closed the way I'd prefer to see it close, a Hanging man.

And on increased volume, the body (open to close range) was almost nothing. So I'll look for a gap up because the strongest reversal confirmation candles must start with an opening gap up, but if it doesn't look like a confirmation of today's bearish candle, then I'll likely look for the exit, but the price and volume action both suggest TWTR has hit some sort of top.

Right now the Index futures are seeing negative 1 and 5 min charts and responding to them, the 5 min is much stronger to go through the night, here's ES.

Just after the close, a strong leading negative divegrence in SPX futures, interesting.

The Nikkei will also be of great interest as will be the 10-year yields, I think it's safe to say , "Now we know for sure Wall St. sees good news as bad news and the taper as Fiscal policy/Tightening" as today's weekly Initial Claims seemed to clearly prove.

OH GOOD LORD, THAT DIDN'T TAKE LONG...  In the time it took to capture the charts and post them , look at the Nikkei 225 futures, compare to the 5 min chart just above. It seems like we are getting our answers pretty quickly.

Nikkei 225 Futures taking a DIVE