The F_E_D Doesn't Really Surprise

So just about exactly what was expected until we got closer to the meeting and people start hedging their bets out further, but F_O_M_C members made it pretty clear before last week's blackout. The initial December taper was right on size at $10 billion a month less, the only change to consensus was it split the $10 bn between MBS and Treasuries ($5bn each), which is a bit of a surprise because one of the reasons the F_E_D had to make a move sooner than later is the shrinking Federal Budget deficits that leave less room for the F_E_D to buy Treasuries that will see a lower pace of issuance.

Bernanke made sure that the bond market didn't pull a 100 bp move like the June meeting by assuring them that "accommodative policy", which in this context is taken to mean ZIRP or waiting longer before a rate hike, would remain EXTRA accommodative even after the unemployment level of 6.5% is breached. However this may be a little bit of smoke and mirrors, the new budget that is being hailed as a bipartisan victory for Congress, cuts out extended unemployment benefits, which means come December 28th 1.3 million Americans will lose those benefits and they'll no longer be counted as unemployed which should lower the unemployment rate on its own immediately, even though they are still unemployed. By the end of 2014, 3.6 million people will be in that category, no longer counted as unemployed even though they are and the rate should drop fairly quickly.

What is now unclear is how the market responds to the new policy "tightening", while the F_E_D is going to great pains to insist that scaling back purchases is not tightening, St. Louis's F_E_D president James Bullard says it is tightening and if you just look at the June reaction (in which the 10 year yield climbed 100 basis points on the talk of tapering), in Bullard's view it is clearly considered tightening and will likely be considered as such by the market. I tend to agree with Bullard. Imagine every month now we get better economic data or Initial Claims every week that look better or Nom-Farm Payrolls in which the unemployment rate is going to shrink by virtue of the labor participation rate alone, can you imagine the market's reaction every time something like that comes out and they know another $10 billion is likely to be stripped away?

I think what the F_E_D has done is not wind down one policy (QE), but create an entire new brand of  "Conventional monetary policy". You know how the market reacts to tightening in rates, should we not expect the market to view tightening in QE the exact same way? Bullard thinks so, even though the F_E_D is well aware of the issue and went to some length today to say, "Tapering is not tightening", but we all know it is as we have already seen the effects in the market this year and two hours of knee jerk trade does not "perception" make.

Speaking of perceptions, it's funny how much they differ, Unfortunately this was one of those days (only F_O_M_C days) that I have to listen to CNBC, all other days of the year I couldn't even tell you what channel it is. From the analysis I heard just after, they called the F_O_M_C's tone, "extremely Dovish", while Goldman Sachs found it more Hawkish than expected, perception moves markets.

Honestly I'm a little surprised how accurately we predicted this move yesterday, take a look at this chart from yesterday issued both during the day and in the Daily Wrap, F_E_D Edition...

" The longer term has shown the SPX lower and likely to pull up to what I thought would be the $1800 level to revert to the mean. Also note that Yields didn't make a higher high today so they are already starting to lead negative as they do so well. To the left at the white arrow, Yields were making higher lows and highs as the SPX was still making lower lows, it called the move up in the SPX."

And that's just what we got, reversion to the mean...

Today's SPX and the $1800 level. Yields spelled bad news after that today, but we'll get there.

Early in the day I assumed we'd have signals telling us what to do with the longs at least before the F_O_M_C as I said the last couple days, it was literally about an hour before, prior to that, we couldn't find anything as the market was in another one of those weird funks of total dislocation that has been described by the presence of a Hindenburg Omen so is it any surprise that today printed the FIFTH Hindenburg Omen?!?!

It's the clusters of them that have proven to be accurate in predicting at least pullbacks although they are really meant to predict crashes.

We'll have to let the knee-jerk fade and the dust settle to see what happens to the QE sensitive assets, the $USD, bonds and it use to be gold, but that has been popping back and forth and has long been out of the true QE correlation. However, although inflation expectations are played up by Bernie as being low and below the F_E_D's 2% target, others would disagree profoundly, we may get more in to that, but the point being is gold is bought on "fears" of inflation.

To get back to what I was saying about pre-F_O_M_C analysis being tricky until about an hour before hand when I actually went ahead and filled out a long and added TQQQ (3x long QQQ) long, so I had some confidence in the analysis otherwise I would never have added an additional full size position right before such an uncertain event, which also makes me think last night's analysis was spot on regarding the initial reaction that had been set up days before mostly in the SPY arbitrage assets.

What gave away the market's knee jerk reaction was exactly what I've said all week and last week, VXX or VIX futures, they are where I said we'd see the first information and it turned out today, they were where  found the only information before the statement, after the statement, it was again VXX / UVXY and VIX futures that had me closing the short duration long trades set up near the highs of the day. If things continue as they did today, I'd say the trading portfolio as well as the core short positions and maybe even some options will be seeing short positions added to or initiated.

There were also a lot of stocks that had made a head fake low just before the F_O_M_C, I took that as another hint and then some divergences here and there.

We did have Dominant Price/Volume Relationship today, it was Price Up/Volume Up and dominant, the Dow had 25 of 30, the NDX 77 of 100, the R2K 977 and the SPX 380, so very dominant, it's the most bullish of the 4 relations, but ironically it tends to signal an overbought market and we typically see the next day down. Yesterday's relationship was the most benign and as I explained, means, "Keep going" or "Carry on", today's is a bit different.

As far as broad breadth, amazingly (I guess this is why we have a Hindenburg Omen again today) is the fact the NYSE Advance / Decline line still can't surpass the October highs. For that matter, the NDX's A/D and the Composite's A/D line couldn't break above November.

As for the Spot VIX, you may recall yesterday I warned that it's candle was getting weak and opening it up to a correction.

 Spot Vix in green vs the SPX has a lower ROC toward the end of the day, if it was increasing vs the SPX, I'd question it, but this is actually the start of something a bit bullish for the VXX, and as I've said, it's when the VXX screams buy is when I want to sell short.

This is VXX vs the SPX today, earlier it was much weaker, by the EOD it was at its correlation, considering the price move today, you'd expect it to be weak like it was yesterday.

I don't want to get ahead of myself, but we are looking for something like this in the VXX, it all depends on whether we have a knee-jerk move that reverses quickly or one that goes through the process, assuming the data keeps coming in the way it has been since 2 p.m.

 For a probable head fake move, the 30 min VXX didn't lose any ground.

This is what really surprised me, VIX futures (5 min) didn't budge either, it looks like that demand that had been missing the last several days which I speculated last night was being thrown in to risk assets for a move like this, the same as what we were doing. This "seems" to be early evidence that trend reversed as traders (smart) may have been doing exactly what we were doing, taking gains in to the highs.

HYG was showing a weaker correlation, but it did make a show, the only problem...

It was being used for distribution.

 This is the sentiment indicator I mentioned in an update today that was very bullish and another part of my analysis that led to me add a full size, 3x leveraged QQQ long just before the policy statement, but look at how it reacts after the gains were made, that's about the same time I was letting go of longs.

 Yesterday as you saw, Yields which are like a magnet for stocks and predicted a reversion to the mean of at least 1800 (SPX), actually $1805, suddenly fell and fell hard, no more positive bias in that Leading Indicator, one of my favorites that had also given me some bullish hints before the policy statement. Does anyone think that someone didn't know or set the market up?

So much for the risk asset, commodities, they weren't buying the move which I suspect (as I always warn) was a knee jerk move, they can last longer than 2 hours, but I do think that is what we are looking at.

The 5 Hindenburg Omens as well as the numerous other indications don't help the "solid bullish move cause" here.

I would have kept those longs if I thought probabilities were good, I kept them in to the most uncertain event of the year based on the charts, but after that, things went south.

 Take the IWM 1 min, about an hour before 2 p.m. it was one of my hints to stay long.

However the 5 min, another story.

There were a lot of these, one of the worst that stands out because of the FAS long position was Financials.

The intraday gave a bullish signal just before, thank you I appreciated it, but...

At 5 mins there's a problem and I mentioned this, I don't want these problems when just next door we have charts like this...

10 min XLF which I had drawn out as a likely head fake triangle, yet that 10 min is really ugly as are the longer charts, this is why I didn't take any chances with those longs.

And you may recall the trend I pointed out in the Black Swan (SKEW) Index, look at the move today (closed at the red hash yesterday), that's right in to the mid 130's where this indicator becomes trouble, a Black Swan and 5 Omens as well as all of out r other information.

I'm not saying I expect a crash tomorrow, clearly the VXX needs to go through some process as do thousands of other stocks, but that's the time I'll be using to collect objective data and entering positions if appropriate.

 Again, 1 min ES tonight, it's not even so much 3C, but the rounding process that's bothersome, I would not sleep well tonight having left all those longs open, even though you know I believe in a reversal process, I just saw too much like XLF above.

And ES 5 mins, this is where I look to see what the market is likely to do, that's not a bullish signal.

After 2 pm I mentioned the 3C divergences in the Nikkei futures, take a look now...

Well, what can I say, it may be a very interesting night. If not, just be patient and we'll do what we always do, collect the data, wait for the trade to come to us.

I'll check back in if things get more interesting in futures later.