I often say the market is like a pendulum, swinging too far one way and then too far the other way. For the last several years all we have seen is it swing too far one way in a nearly stupefying lack of common sense as traders who have come in to the market over the last 5 years think this "Is the Norm", it is anything but.
The market's unprecedented advance on one of the worst economic disasters and failed Keynesian experiments in economic history, likely only outdone by the Bank of Japan's incredible train-wreck (The F_E_D has never put out so much and got so little in the way of results, normally the economy would have turned back to growth within the 2nd or 3rd year, we are well past the 5th and just printed the worst quarterly GDP in 5 years despite a 4 trillion dollar F_E_D balance sheet expansion). The F_E_D has intentionally created the "Reach for Yield" or "Wealth Effect" ans thus the current market bubble by keeping rates so low for so long (ZIRP-Zero Interest Rate Policy) the F_E_D itself has created a whole new class of trader that has never seen anything else than the F_E_D's manipulated market and they think this is the norm, "It's different this time" are the famous last words that have sent many in to economic obliteration. Even the Bank for International Settlements, BIS which is known as the Central Banks' central bank, has said the path "Leading central banks" have taken has been akin to a band-aide with no results at the end and warns then not to raise rates too slowly or too late, this is what traders (retail) don't get because few have been around long enough to see a F_E_D tightening cycle, just look at the market around 2000 and 2007 and what comes next, except this time add an economy that never healed, huge unemployment, a global economic crisis and as the BIS warned, Central banks that are stretched so thin, it's questionable whether they have the ability to respond to even a normal recession.
Just today CYNK Technologies hit a valuation of $5.9 billion dollars trading on less than 100k shares a day, the problem, the social media development company has one employee, no website, no revenue, no product, and no assets. However, that won't stop retail traders in their "Reach for Yield" which is entirely created by the F_E_D's ZIRP interest rate policy which was suppose to spur capital spending, instead companies have elected to forgo spending and many have choose the short term sugar rush of share buybacks on borrowed (yes borrowed) money, nothing that creates growth, just more debt.
Make no mistake, the pendulum will swing way too far in the opposite direction. The ONLY thing that pushed the market higher was the F_E_D's accommodative policy which we will be out of in October as the QE taper will wind down according to the June Minutes with a 15 billion final taper in October, after that it is the direct opposite of accommodative policy, Policy normalization in which rates will move from ZIRP back toward 4%, yet the economy never recovered. The jobless rate is a sham that is magically created by manipulating the labor force participation rate, once you fall off unemployment benefits, you are no longer part of the labor force and no longer counted as unemployed thus the unemployment rate drops even though 3 million Americans who otherwise would like a job will fall off extended benefits (as Congress did not renew them in this year's budget) and out of the labor force in 2014 joining some 91 million already not counted and not working regardless of whether they'd like to be or not.
What the average trader does not get is exactly what The St. Louis F_E_D president, Jim Bullard recently said on Fox Business News, "The market is wrong", the market has no idea how close the F_E_D is to its tightening cycle, even throwing out a date as early as Q1 2015, 3 quarters ahead of market consensus even as JP Morgan just "For the first time in recent memory" (their words) revised the rate hike expectations pulling it forward two quarters, still 1 behind Bullard's Q1 2015. This as we see more GDP downgrades even today. Remember, 2 consecutive quarters of negative growth=recession and Q1 was a disaster at almost -3% negative growth, and that's all weather? If so, the economy is in worse trouble than thought.
Here's the most current 2014 GDP downgrade...
This morning after Portugal's largest bank missed a bond payment and that contagion spread like wildfire through sovereign bonds and US Index futures, it became very clear that Europe is far from fixed, especially the financial system. April's last trading day of the month which saw the second highest utilization of the F_E_D's reverse 1-day repo so banks could make their balance sheet look good (if only for a day, but the only day that counts) highlighted the US banking sector problems until the end of Q2 just a few weeks ago when the F_E_D's 1-day reverse repo on the last day of the quarter set a new record with an apparent bank shortfall of nearly 1/3 of a trillion in assets as they were borrowed from the Reverse repo facility only to be returned the next day (end of the quarter) to fool clients. investors and get this, regulators who happen to be the same people who lent them the assets, the F_E_D!
So we have a tightening cycle coming, a probable recession, inflation, stag-flation and stocks with no assets, no employees and no revenue with a valuation of over $5 billion dollars as moronic traders are willing to buy nearly anything put in front of them as most were forced in to the market due to the F_E_D's reach for yield and most have no idea what a tightening cycle looks like. All of this and 3C already looks worse now than it did in 1929! Yes, there's huge opportunity here, you just need to think outside of the box and react quickly to changing markets.
Today the initial move down was accumulated and apparently sold in to as the day wore on, not what I expected, but may have something to do with a pin for tomorrow's max-pain options expiration (weeklies). I was surprised as well by numerous momentum stocks that had clean positive divegrences for a bounce, they saw some significant damage today, most are still strong enough to bounce and thus be able to be shorted in to, but I'll be watching tomorrow to see if more damage is done which would raise the possibility of scenario number 2, that the positive divergences were just enough to keep the market from sliding down even further so options expiration max pain could be capitalized on as most options are written by Wall St. and most will expire worthless with their op-ex pin.
Gold made a new 4 week high, but as I showed earlier, I doubt it holds as GDX has a close correlation to gold.
USO closed up for the first time in 9 sessions, we may have a trade here,
The USD/JPY was ramped right before the open and ES seemed to stick pretty close most of the day, but remember the BOJ has a line in the sand at $102 which they have and will defend.
The Most Shorted Index saw a lot of shorting on the open,
The distribution at the end of the day in the major averages was surprising, there was some minimal accumulation in to the close, but I suspect we aren't going to know much until tomorrow's op-ex pin is lifted around 2 p.m., otherwise I suspect we probably won't see too much other than steering currents.
The Leading Indicators post today is exceptionally important, if you haven't seen it, make sure to take a look, you have to know where you are to know where you are going... Big Picture Charts / Market Map
The CBOE SKEW hasn't been updated yet so I'm not sure where it came in, but as you know the recent trend has been up and quickly meaning smart money has been buying out of the money, low strike puts expecting a Black Swan or worried enough to try to hedge any long exposure they have with these deep out of the money puts.
There was no Dominant Price/Volume relationship among the component stocks of the major averages, but interestingly among the 9 S&P sectors, Tuesday 8 of 9 closed red with only Utilities (the Flight to Safety trade) closing green, yesterday it was the exact opposite with 8 of 9 closing green and utilities being the worst performer, today it is flipped again with 8 of 9 sectors closing in the red with the only one in the green, Utilities up +0.68%.
If anything develops overnight in futures, I'll let you know.
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