Correlations

As mentioned in yesterday's Daily Wrap... Index futures fell out of sync with USD/JPY yesterday although we've been seeing minor dislocations that seem to always come right back to the USD/JPY correlation, at least 5 significant events last week and we are already seeing a significant one this week.

"For instance, today ES/the market didn't track the USD/JPY as it held around its 200-day moving average, instead bond yields (one of our leading indicators) led the way for the market much of the day, as faithful as the carry trade correlation has been, it couldn't be counted on today."

Overnight once again, Index futures tracked bond yields rather than USD/JPY as the BOJ sent the carry pair lower.

Here are some example charts...

 This is USD/JPY (red/green candlesticks) vs ES (purple SPX futures), at #1 (far left / white box), this is the break of the correlation mentioned yesterday as USD/JPY held support around its 200-day moving average while ES plummeted, at #2 the correlation was still inverted overnight, at #3 we have the return or reversion to the correlation as the Yen seems to have seen some sort of intervention, pushing the USD/JPY higher after the overnight decline and at #4 the correlation is reestablished.

 This is a 1 min chart of overnight to present of USD/JPY vs ES and the reversion back to the correlation that broke pretty badly yesterday.

Overnight however as well as yesterday afternoon when the USD/JPY correlation broke, the market locked on to yields...

 This is the SPY in green from yesterday and today vs 5 year yields (remember yields move opposite bond prices).

This is the larger picture for Yields vs the SPX as a leading indicator, the market has some significant catching down to do to yields.

The two yellow boxes are what appears to be a small Crazy Ivan shakeout on both sides of the bear flag pattern.

This is what happened to Treasury futures last night across the curve (10 year benchmark) , the 5, 10 and 30 year all sold off in front of the F_O_M_C minutes release this afternoon and that sent Yields higher, the Index futures latched on to yields like yesterday.

I mentioned that Yields may drop off soon, at least near term, but it remains to be seen whether Yields or the USD/JPY will be the dominant correlation, right now it seems as if both are.

This is TBT, the UltraShort of TLT (20+ year treasuries), in effect it would be similar to TLT's yield movement as TBT is the opposite of TLT with 2x leverage. There's an intraday 1 min negative divegrence and that's why I said TLT and Treasuries look like they'll find some support and that may put a roof on the market's early move higher.

The 2 min TBT is also in a negative divegrence, not as large as there seems to be a very early form of migration.

At the 3 min chart TBT is in line so this would be VERY early in the process if Treasuries were getting ready to make an about face reversal.

 Really I'm not at all ready to say that, just that this near term action should have some effect on the market.

As far as the ES vs USD/JPY correlation that has now reconnected since this morning after reversion to the carry pair, it looks like a negative divegrence in the USD/JPY as well, you can see the negative just before the BOJ policy announcement overnight and a positive at the lows in early a.m. hours. The current negative along with action in Yields suggests that the market may have topped out for the moment which would not be surprising at all so close to the release of the minutes.

SPY is still in line intraday, QQQ is negative right now...

QQQ intraday

And the IWM has already lost ground to its early negative divegrence.

As mentioned last night, there's a lot of dispersion between the averages, I'm going to look closer at Industry groups and see if I can figure out which ones may be worth a look .