The Week Ahead

I hope everyone had an enjoyable weekend.

This week's centerpiece event will be the F_E_D's most important F_O_M_C meeting of the last year (as each of the previous ones have been as well, ever since "Taper" talk surfaced); it starts this Tuesday and we'll have a policy statement Wednesday at 2 p.m. Many believe that the F_E_D is set for a December Taper, of course many have thought the same about each of the last F_O_M_C meetings and have been dead wrong, but there has been some talk from F_E_D regional presidents just before the blackout period starting last week, that suggested a taper is more realistic now than any time since that early summer "Half the respondents thought QE should be wound down in full by the end of 2013", which in turn sent the 10-year interest rates up 100 basis points in no time and out of the F_E_D's control, thus the F_E_D reversed course and made no mention (for practical purposes) of a taper again. At the time when the F_E_D went from full-on Taper to the next meeting that almost totally ignored it, I asked the question, "What is the F_E_D so afraid of?" At first I thought it may be a taper coinciding with the government shut down and although that's a good guess and maybe even on target to some degree, F_E_D actions and statements since have shown what they were really afraid of was the bond market's response in sending the 10-year benchmark (that sets all kinds of other rates from mortgages, to car loans and credit card interest) up a full 100 basis points, something that previously only the F_E_D was known to have the ability to do in general.

Since then, the F_E_D has gone through extreme pains to reassure the market that the initial guidance of rates rising about 6 months after QE is wrapped up, is no longer on the board and "Accommodative policy" will remain in place for much longer than expected, which retail traders took to mean QE on several occasions when Ben truly meant ZIRP rates, but he did leave it ambiguous enough to allow for the market to think he was talking about QE, bond traders knew he was sending them a big olive branch with a huge bow and nearly begging them to trust the F_E_D won't hike that fast.

For my part, I don't try to guess what the F_E_D will do, but it is assumed that a taper would start on a small scale of $10billion a month or so at first and from treasuries while they maintain current levels of MBS purchases. For the market, it's always been the treasuries that have moved the market. QE1 started in 2008, you might not know it because the market didn't go bull-crazy until early 2009 when QE1 was expanded to include Treasury purchases, that essentially marked the bottom of the 2007-2008 stage 4 decline. I will make the same warning I have been making in front of every significant F_E_D event for the last 5 years, "BEWARE THE F_E_D KNEE-JERK REACTION".  We seen it time after time, it's a much higher probability that it will be there than it won't. It typically lasts from a few hours to a few days and it is almost ALWAYS wrong and faded. The knee-jerk reaction is strong, it's a hard trade to fade, but when timing signals are right, it can be a great opportunity, it's just another one of those very difficult emotional trades, to fade a move that seems so strong and seems to be a direct result of F_E_D policy which most people see as the Marty Z. mantra, "Don't fight the F_E_D". We'll cross that bridge when we get to it, but I'll say the market has seen a set up pre-NFP and the NFP print was about as bad as it could be for those wanting to see QE last, yet the market acted very differently, you may recall however that we were pointing out that this Friday NFP market reaction was being set up in credit 4 days before and in the VIX 3 days before. Additionally it's no secret that many believe a December taper is coming because the economic data on the whole has been supportive of such a move and it will be even more supportive as we have moved in to the Seasonal Adjustment period which we have seen the last two years. Economic data during this period that lasts until about March/April, sees just outright made up, strong economic data. The Economic Surprise Index that use to be available was a great tool for watching the trend start and reverse nearly on a dime. However at the same time many who were sold on a December taper are not as convinced because of Core CPI (inflation data). I personally didn't think December would be ideal considering holiday purchases connected to market headlines and more importantly the end of year market nuances. Also the inventory builds that saved Q3 GDP are going to likely make Q4 GDP not look so great and the F_E_D is aware of this, that's just opinion though not worth much.

Here's a full look at the U.S. economic data for the week...

Tomorrow before the open we have Empire State Manufacturing Survey and Industrial Production. Tuesday before the open we have CPI, Wednesday before the open we having Housing Starts and at 2 p.m. the F_O_M_C policy statement. Thursday are normal Jobless Claims , at 10 a.m the Philly F_E_D Survey and Exiting Home Sales (should be an interesting week in housing and getting more interesting as we move forward), Friday we have Q3 GDP (revision) that is expected to come in at consensus and at previous. Expect EXTRA VOLATILITY this week as we not only have significant data and the F_O_M_C, but Friday is Quad-Witching which is the expiration of Stock Index Futures, Stock Index Options, Stock Options and Single Stock Futures, being Quad Witching is coming up right at the end of not only Q4, but 2013, expect lots of volatility as WINDOW DRESSING will be a dominant theme, I suppose a lot of funds won't know which way they want to go with many assets until they hear what the FO_M_C has to say Wednesday, but that should set us up for a lot of volatility in to year's end. This is the time we typically have the Santa Claus Rally, but the last two weeks have been some of the worst weekly performances in many ways in months if not the year in many aspects. ***Since we have the holiday's (market closures and early closures), I feel the typical movement that has to be executed on a T+3 basis (Trade plus 3 days to settle) and considering the Wall St. vacations, I feel a lot of window dressing will be pushed forward earlier, in fact I'd say starting around 2 p.m. on Wednesday (minus the knee-jerk effect). Again, VOLATILITY seems to be what's in trader's stockings early this year.

One last thing, many of you know about our "Cats and Dogs" trading concept/season. It's a time when low cost stocks tend to run and make big gains in a day or a few days, they are usually well set up ahead of time, the psychology behind it seems to be the Greed Effect, people who missed the market moving jump in as late comers, but they don't want to pay up for stocks that have already moved so they tend to look for the "Cheap" stocks. I set up a filter/scan today for stocks under $3 with at least an average of 250k shares traded daily, optionalable and my secret to finding "EARLY NEW Bull Market Winners", stocks with a high P/E and very low or negative cash flow. I'm not quite sure why this works, but I've backtested it and it's one of the greatest fundamental edges in a scan for long positions. I'm guessing these stocks do well because they have something (as the market is all about sentiment and perceptions) that make investors willing to bid them up (evidenced by the high P/E) and don't care that they are bleeding cash, perhaps they believe in some product these companies have, but they are almost always NASDAQ (4 letter tickers) and they are typically easy to remember like: CRIS, ROYL, FOLD, COOL, DSCO, PLUG, SONS, IVAN, etc. 

These stocks tend to pop off left and right near the end of a bull market run for psychological reasons you can figure out. I ran through a large watchlist that met my criteria and there wasn't much of anything on deck, most had already made either move a while back, I'm guessing around the same time we kept (initially) hearing about record NYSE Margin and Investor negative net worth, the reach for yield on an extremely leveraged basis. The point is, the C&D trade wasn't there and psychologically, if it's not there at this time, it has already happened.

As for futures tonight, WOW, volatility has started.

 3C on an intraday 1 min chart really went south after Index futures opened tonight, you'll see it more defined in the other index futures, but around 10:08 over 10k SPX contracts were dumped all at once in a thin, illiquid market sending ES DOWN 11 POINTS IN THAT 1 MINUTE BAR.

Why would anyone holding ES dump such a large lot all at once knowing the reaction was going to be a huge loss unless.... ??? In any case, as I said, 3C picked it up just after futures opened for the week.

This is NASDAQ 100 futures, you can see a similar dump at the same time on just under 1900 contracts in that 1 minute bar.

The Russell 2000 futures like NQ above this chart both show 3C going very negative as trade opened for the new week, here a large block of about 800 contracts were dumped. I really don't understand this other than some kind of reverse ramp, maybe something that hasn't happened yet will explain it, perhaps the rest of the night will be accumulation in smaller lots, the Nikkei futures which got slammed as well seem to indicate something like that may be happening.

 Nikkei 225 futures, note 3C.

The EUR/JPY which opened earlier had been sliding, but I can't see that as reason to dump so many contracts in one big block or 1, 1 minute bar when they know what the outcome would be so obviously it was intentional, but for what reason...? 

The Yen as you might imagine, had been running (with EUR/JPY dropping), but it seems like even that YEN run is seeing 3C distribution which could turn the carry pair around and perhaps start accumulation overnight in more sensible size.

As none of the EUR/JPY move can be pinned on the Euro which is actually acting pretty well on its own, I had to look at the Yen, guess what I found?

Yen single currency futures, accumulation in the Yen as FX opened earlier for trade, this is what sent the EUR/JPY pair lower, not the Euro and it's clear as there was distribution in the Index futures, there was confirming accumulation as the new week opened for FX trade in the Yen, but just like the positive divergence in Nikkei 225 futes, we have a confirming negative divegrence currently in Yen futures, as I said above, perhaps someone will be accumulating on the cheap throughout the rest of the overnight session in lots that aren't going to call attention like this one.

Until the morning when we can see more, you know how we are positioned for short duration trades and our longer duration core positions, it should be interesting.

I'll see you in a few hours.