Daily Wrap

This week had a lot of big changes, many unexpected, some expected such as last Friday's call for a bounce this week, we saw a bounce in 3 of 4 averages, but a very weak bounce. I'm not sure what was more important, the F_E_D making it clear that they are going to be making moves a lot sooner and a lot bigger than expected or the fact the market has actually started discounting which it hasn't done in at least 5 + years unless it was F_E_D related as shown in last night's QE chart.

We expected a pullback in GLD and GDX, they have a lot more to go in my view, but were down just over 2% and -1.54% on the week.

Breadth was destroyed this week (and the last few weeks), as I have said, in some 15 years or so of watching these indicators, I've only seen them move like this twice, the first time was the 2007 market top.

Here are some examples...

 In green "Percentage of NYSE Stocks trading 2 Standard Deviations ABOVE Their 40-day Moving Average",  not only has this dropped significantly while the market is near tear to date highs, the percentage of stocks trading 2 SD's above their 40-day are nearly at new lows for the year!

Stocks trading 1 standard deviation ABOVE their 40-day moving average are at new lows for the year.

And ALL NYSE stocks trading above their 40-day moving average are almost half of what they were a month ago.

The SKEW Index is Still in the same elevated red zone, I saw today some other financial media outlets are taking notice of the massive dislocation between credit markets and stock markets, a major red flag and volatility, A change in character, is finally picking up which is common just before a change from 1 stage like the stage 3 top we are in with most assets and stage 4 decline or bear market. There are numerous other leading indicators also flashing the same red light.

As far as a bounce as I have been talking about since yesterday on a short term volume capitulation event and a IWM chart that has stayed positive all week as well as the positive divegrence in the index futures after the close last night, it's not anything unusual in the IWM's case, it's also not guaranteed, with the increase in volatility (after 60+ consecutive days of the SPX not making a move up or down of 1%), the last two days have seen moves in excess of 1% up and down, just look at the VIX yesterday. With an increase in volatility, you get increased unpredictability, look at the market discounting yesterday's tragic events, it didn't move at all on the sequential collapse of governments during the Arab Spring, it didn't move when we were saber rattling with Syria and Russia, it hasn't cared at all about Ukraine or Iraq, suddenly it's discounting a tragic plane crash.

These breadth charts have so much damage, no bounce, no matter how strong is going to repair them and if you think about what they really mean, they mean more and more stocks are trading lower and lower.

I think we do get a bounce in at least the IWM, we'll know more Monday as I expect a pullback as 3C tends to pick up where it left off, that will tell us a lot about whether the IWM still has it in it.

However, I'd be sure you are pretty much prepared. This is the kind of market in which the hedge fund herd breaks up and it becomes every man for himself and there's only 1 small door as we saw with AAPL's nearly 50% decline in 8 months.

All things considered, breadth, credit, SKEW, the IWM, 3C charts, weak bounces, F_E_D panic, I'd say we have already topped for all intents and purposes. I don't think chasing a 2 or 3% gain at this point makes much sense considering what typically happens next, a large gap down on some unsuspecting, seemingly normal day that takes out months of gains on the open. This is why I'm not moving any core shorts and only hedging here and there where it makes sense.

Have a great weekend, I'll likely have more on the bank/F_E_D collateral problem and the repo markets.