For the last few days I've said that the market has "lofty expectations" for Draghi. This is just two mentions of the same theme 8 times this week before today...
Monday June 2nd A.M Update
"In Europe, the ugly mix of low inflation and near record unemployment as well as another (second in a row) overnight miss in Eurozone May PMI (from 52.5 to 52.2 on consensus of 52.5) that sent bonds higher has set expectations even higher than the already lofty consensus expectations for Thursday's (6/5) June ECB meeting, with an overwhelming number of economists expecting NEGATIVE INTEREST RATES via cuts to the deposit rates with additional expectations of the main benchmark lending rate to also be reduced. Furthermore there are expectations for a new ECB long term LTRO program and easing of lending standards with many expecting Draghi to do more than "HINT" at possible outright QE at the press conference after. I believe the economists surveyed are largely on board with this line of thought with something like 56 of 58 holding these expectations which leaves a lot of potential for disappointment with Thursday's meeting/policy announcement and press conference."
June 4th in Quick Market / SPY Update I said,
"personally I think expectations are way too high, the press conference will be a big deal as well, although Draghi does a lot of talking and hasn't followed it up, but they're having a real inflation/unemployment problem so I'd think, despite lofty expectations, he has to do something, although I do have a gut feeling it will fall short. Look for volatility between the policy announcement and the press conference, in fact I'd suspect most of the day."
Lets just track this thing...
-The Refi rate was cut by 10 bps to 0.15%
-The Marginal Lending Facility was cut 35 bps to .40
-And the widely expected Deposit Rate Facility was cut by 10 bps, creating a situation in which you have to pay to deposit money at banks/ECB.
-A Targeted $400 bn LTRO was included as expected
-The SMP sterilization was suspended
These were the market expectations that were priced in, ES after being FLAT all night rallied, the Euro sank, the $USD rallied off Euro weakness, USD/JPY rallied and gold briefly dipped.
However, the danger of disappointment was always the press conference, "would Draghi mention some outright QE?" True to our expectations as Draghi is a lot of talk and a lot of caution, the press conference was a disappointment and ES promptly faded all of the earlier gains. The Euro pared its losses and went on to move to a new 10-day high (not what Draghi wanted), this was market disappointment. The $USD pared its gains that were based on earlier Euro weakness , USD/JPY turned from knee jerk strength to weakness. Volume was high on the press conference downswing in Index futures.
Then around 11 a.m. comes David Tepper of Appaloosa who had just said on May 15th, at Skybridge's SALT conference "Don't be too freaking long,...Investors should approach the market with more caution...I'M NERVOUS ABOUT THE MARKETS, IT'S NERVOUS TIME".
This is the same David Tepper whose 13-F filing for the quarter ended March 31st 2014 (Q1) was rleased the maximum 45 days later which I had posted just to show the size of some of these hedge fund positions.
At the time on May 15th (remember this date) when Tepper made the above comments, Appaloosa's 13-F showed the fund's top 3 holdings were SPY calls with a notional value as of March 31st of $1.1 billion dollars, the second place position was $900 mn in SPY (ETF) and $815 million in QQQ.
Not that it matters, but this was a change from the December 31st 2013 holdings of approx. $8 million in SPY calls, $2.1 bn in SPY (ETF) and $765 mn in QQQ (ETF).
Tepper's May 15th comments were attributed to early SPX losses of -.80%, Dow -1.07%, NDX -.90% and the R2K -.90%, whether this was the cause or not is not really the point. Also what Tepper's fund held when the 13-F was released 45 days later likely was vastly different than the reporting date of March 31st.
However, you may recall that May 15/16th is when we came up with our forward looking market move based on a bear flag in the SPX.
On Friday May 16th I put forward our market expectations based on the move Tepper's comments are attributed to and the resulting bearish bear flag, here's the post on May 16th, EOD Market Update in which I said,
"QQQ is the same as the SPY, this is good as confirmation, however the larger move that "Should" follow (assuming we do get a Crazy Ivan shakeout with a break below the flag first) is the larger breakout above the flag which is not expected by the rules and precepts of Technical Analysis, thus it is a head fake move."
And...
"That's what I see going in to the close, if anything pops up in the next 10 mins or so, I'll let you know, but that's where probabilities rest as of now, a pop above the bear flag formation which is useful to short in to and perhaps a Crazy Ivan which may open a second trade, a short duration long hitch-hiking trade to ride the head fake move above the flag, but we'd want that pullback or break below the flag to reduce risk and make it worthwhile."
This was in response to the fact that the multi-month range was not likely to turn to the downside BEFORE a head fake move and the bear flag manipulation was a way of creating momentum that we even talked about trading as a hitchhiking long. Here's the chart...
For Tepper, if he wanted to sell long SPY , SPY calls and QQQ, there's only one way to create that demand, that's to create an upside breakout above the multi-month range, positions that big NEED demand to be sold in to and at a better price without taking a loss.
However, as the breakout came to pass and the move above the multi-month range created demand, we knew that it was a head fake move and large funds "like" Appaloosa were selling/shorting in to the short squeeze rally above the multi-month range from May 27th to present. We have multiple confirmations of this, but here's one 3C chart of the action during that time period.
Looking at the 30 min 3C chart as it broke out above #1 causing a short squeeze at #2, we see massive distribution of the rally/head fake/short squeeze and it's actually a lot worse than what you see here, I'm just focussing on the important area. The 30 min chart looks a bit more like this zoomed out to trend...
Even if I had doubts about the numerous confirmations of distribution on this move, we can thank BofAML for their charts showing what Institutional money was doing and what retail or dumb money was doing ...
Institutional money were net sellers and in a big way, they need someone to sell to though, retail money on the second chart were net buyers, that's what 3C is designed to track, not price, but the institutional/smart money trends that price doesn't reflect.
The point being, Institutional money with position's like Appaloosa's that are over a billion dollars, can't be sold in to a flat market without crashing the asset and taking large losses, they need demand, they need buyers who are anxious to buy and they need time to move a position that large (that's just one fund), if they try to dump it too fast, they once again crash prices and take losses.
That brings us back to today as the ECB disappointed and the market was heading lower...
Does it strike anyone as strange that just 20-days after saying , ""Don't be too freaking long,...Investors should approach the market with more caution...I'M NERVOUS ABOUT THE MARKETS, IT'S NERVOUS TIME"." Tepper, an unscheduled guest on CNBC called in and said...
His "Fears" were "alleviated"?
Furthermore, Tepper added that his, Current positioning would allow him to ramp back up to a bullish posture if conditions changed?
What?
If I was wearing my tinfoil hat, I'd say that an easy way to get out of any remaining SPY calls or SPY/QQQ longs would be to create a bearish atmosphere as he did May 15th, create a bear trap and squeeze it, that provides the breakout and the dumb money demand. Today's stick save allows that short squeeze that was pretty hollow as there wasn't even intraday confirmation to do EXACTLY the same, sell/short in to demand.
Not everyone was buying it though...
As for Index futures, you'd think they might be pumping higher in the low overnight market, but they're pretty flat with negative to leading negative divergences.
Remember, we have Non-Farm Payrolls at 8:30 tomorrow morning.
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