Market Update Charts

People get nervous when they hear "bounce", I tried to make it clear this is intraday if it gets going at all, which means it lives on the 1 min charts which are steering divergences for intraday trade, at best they can represent market maker or specialist activity, but that's much less clear than it use to be with the advent of High Frequency Trading becoming the primary source of liquidity, that is until they don't which is one of the many very dangerous market structure flaws that the SEC should have done something about long ago.

Not to get off subject, but lets consider a pretty nasty crash, like the NASDAQ around Q2 of 2000, back then HFT's were not even heard of, you know who went up against the market makers and specialists back then? Day traders who specialized in scalping. A Market Maker (NASDAQ) and Specialist (NYSE) perform the same function, they facilitate an orderly market and match orders, they are by law the buyer/seller of last resort so long as you have your order placed at market which means you accept whatever their bid ask spread is which widens considerably in a volatile market or a crash. By law, for the many perks these middle men get such as naked shorting, the bid/ask spread on hundreds of thousands of shares, and other things the common trader can't get, in return, they have to provide liquidity. Day traders of old (especially before we went to the penny system -the market use to be quoted in fractions rather than cents) would see the best bid/ask from the market maker or specialist and they'd jump in front of it and try to capture that spread, known as scalping. Today there isn't a day trader in sight that isn't running a black box system who can compete when HFTs can execute in microseconds, the spread changes faster than you can blink your eye.

So some forms of HFTs have taken over where day traders left off and are content to make $.02 or $.03 on the spread thousands of times over and over and then also cash in on the volume rebates for sending their order flow to a particular clearing house.

This means that in many cases, a market maker/specialist doesn't have the inventory they use to carry because with the market moving so fast from HFT's, they risk getting stuck holding inventory at levels that put them at a loss, they have had to become more lean.

In a market crash, think about the May 6th 2010  Waddell & Reed Flash Crash when the Dow lost the most points ever (not percentage) in minutes. Some argue HFTs did cause or contribute to it, some say they helped mitigate it, the SEC and CFTC decided in their final report that HFTs contributed to the volatility while the CME disagreed.

In any case, it doesn't matter, what matters is that in a situation like that HFTs are not bound by law to provide the liquidity they provide now, they can just shut down and sit it out and let the market makers and specialists who are likely largely unprepared to handle such a situation. Sure we have circuit breakers, but when one goes off and you just watched the market drop 2% in 2 minutes, the first thing you'll want to do is get out as soon as the market reopens for trade. What exacerbates the situation is the exceptionally low number of shorts in the market, which represent a commitment to future buy side demand, many firms won't trade a stock that doesn't have "Healthy" short interest because if there's a Black Swan event as the CBOE's SKEW Index has been warning, there's no shorts to step in and take profits which is done by ""Buying to cover" which is the exact same as buying.

The market structure and the fact that it's inflated status is not a function of value, but a function of temporary liquidity (even if temporary means years, it must end), massive margin / leverage and investor negative net worth, taken altogether, it's a recipe for disaster as the SEC has fallen WAY behind the curve in facilitating an orderly market and no one thinks about it as long as things stay the same, but I've seen it too many time, you wake up one morning and you have a gap down that wipes out months of longs, that creates a snowball and HFTs are likely to exacerbate it by their activities or to just exit the market and watch liquidity dry up, then see how wide the spreads are.

In any case, I diverge, but it's interesting how many people are willing to stand in front of a steam  roller chasing nickels and dimes when the red flags are flying at full mast. That's Greed, one of two emotions that moves the market, but fear is even stronger, that's why markets fall much faster than they rise.

OK, so the charts from the last market update seem to be algo/arbitrage driven "IF" they can make it work, the reason I say "IF" is because HYG has been sold aggressively in to every recent move on the upside to activate the arbitrage scheme and although many have different opinions regarding the VIX this week such as a low volume smack down, mine is that tax selling and the last day of window dressing to be able to settle before year's end was yesterday is likely the cause because many of the longs that may be sold for tax reasons or for Window dressing were likely to have a matching VXX or VIX futures long to act as a hedge, if you sell the long position, you don't need the hedge so you sell that at the same time. A low volume market means wider spreads so that would contribute,  but it was noteworthy yesterday how fast VXX accumulation started up around 2 p.m., I'm guessing if I'm in charge of executing trades for year end and 2014's new prospectus and view of positions, I'm not going to wait until 3:30 and possibly not get all my work done and have a boss wondering why the hell I didn't finish the trades when I knew come 4 p.m., there was no longer an opportunity. So assuming they wrapped up early, well lets not even assume, lets just go with facts, around 2 p.m. yesterday all of the sudden the VIX went from in line to leading positive on a 10-min chart which means some heavy transactions were taking place.

Here are the charts captured right after the last post...

 The DIA as mentioned never even went intraday 1 min positive.

The IWM was the only one with a 1 and 2 min positive

The Q's were 1 min positive only

 The SPY was 1 min positive only.

ES was in line, but look at the volume falling off badly as traders pack it in for a trip to the Hamptons, if you were going to try to move the market and there are a lot of reasons, HFTs can move it up a 1/4 or half a percent and make a killing, it may have nothing whatsoever to do with the state of the market and more is just an opportunistic move because they can with volume so light.

 HYG with a very flat range looked to be one of the instigators and checking, sure enough it is.

Although VXX is growing much more positive much faster than anticipated, it's the other half of the arbitrage and needs to move down vs HYG up for it to work.

Yet as mentioned, big changes in Short term VIX futures yesterday afternoon, they've been added to today as well, so once again there's a significant difference between 1-3 min intraday charts and 5-60 institutional charts.

 TICK is flat as can be at +/-500, almost no movement, no trend.

Worse than that is my custom TICK indicator on a larger scale, you see TICK is falling off badly, this easily explains why last night's breadth charts showed all of the "Percent of NYSE stocks Trading BELOW their 1 and 2 standard deviation 40 and 200 day moving averages"  trading up, in other words while the market put in it's gain, more and more stocks yesterday were falling below those moving averages at 1 and 2 standard deviations, all four in fact, four for four.


Some of those divergences have already mellowed out, some are worse like the DIA.

I'm going to spend the remainder of the day looking at positions and seeing if there are anymore great cues like yesterday's TWTR and MCP, both of which made for great 1-day moves even though they are meant for more. I'd be considering taking those gains and enjoying the rest of the day at the beach.