The thought last week that the reversal process will end like 80% of them, with an upside head fake move that is the best place to enter a short, which was also this week's "Week Ahead" forecast on Friday, seems like it's still on track, but from a number of small oddities in the market showing as I have said several times, this cycle, this market are very weak and need all the help they can get and it appears with credit in retreat and the carry trades failing to hold the market together, they've resorted to some interesting new tactics out of desperation, but as I said, there's very little that will stop them from completing the goal which is the purpose of a cycle.
Where to start?
Global PMIs gave a bleak outlook for major manufacturing countries. Australia and Italy both fell in to contraction with readings below 50 (above 50 is expansion, below is contraction). Some of the core countries in Europe saw significant declines such as Italy, France, Spain and GERMANY. While not especially significant, China also saw some contraction in their PMI, which is interesting given the action in commodities today, even though the $USD hit a 14 month high while gold hit a 3 month low. Silver and Brent/WTI crude were also smacked down.
The question is, at least in some of these commodities, whether it was the strong $USD (strong on JPY and GBP weakness sending the $USD to 14 month highs) which would mean after years of largely ignoring it, the Legacy Arbitrage between the $USD and commodities may be back or on the other side, global manufacturing slow downs and contraction is slowing the demand for raw materials. This is just a flash for now, not a trend, but it will be very interesting to follow.
In the US, ISM Manufacturing came in at a nice beat, the best in over a year, printing at 59 with strong construction spending and new orders, Employment was the dark area. An interesting divergence. In any case, the initial response seems to be positive, but once again, the European close effect reared its head and the market was pretty much downhill from there with USD/JPY carry that lifted Index futures overnight...
There's still a significant negative divergence in the $USD (remember CITI closing all $USD longs last week expecting a deep pullback...
The averages... While the SPX held on to +2000 today with some help, there certainly isn't anything resembling follow through and the averages themselves are fractured, a sign of weakness. For example...
If you understand Dow Theory, than the outlier today, Transports +1.29% puts a big hole in any kind of market strength and gave us a nice looking opportunity today to take advantage of price strength on market weakness.
I mentioned last week the signs/signals that Treasuries, specifically in the long end/TLT and the 10-year looked like they'd pullback soon and offer a nice buying opportunity. Oddly for the 7th time in 8 months since February, Treasuries started the month on a down stroke with TLT down a whopping -1.95%...perhaps the market and yields will revert to the mean (stocks down, yields up?)
Most of the afternoon there was quite a bit of weakness as I mentioned, HYG was not there as it gapped lower...
The market got some other help as well at the lows of the day, namely from VIX which decoupled right around the European close...
However, this was not it as far as market manipulation and help, here's a new one... From the guys who track EVERYTHING in the market in micro-seconds, NANEX, I caught these tweets from Eric (one of the few people I follow)...
The correction is actually 1 out of 4 trades was less than 100 shares, a record since odd lots began reporting in December of 2013.
The interesting thing is, a bunch of 1-share orders and a record number of odd lot orders went through, I suspect they were a bunch of small orders hitting the ask and raising prices without actually spending much to do nothing other than regain SPX 2000 and...
Some other indications that make me believe the head fake move is still on track other than the evidence that's what they are shooting for in transports which was probably a bit easier with Energy down, some leading indicators such as Pro-Sentiment, they moved to the upside at the day's lows.
Also the 5 year yields which are a short term magnet for equity prices were up as treasuries were down (remember the first of the month correlation with treasuries 7 of the last 8 months, there may be something there)...
One market (other than HYG) that is not interested in taking on that short term risk is HY Credit (again HYG made that clear this morning, but HY is a bit different than HYG as it's not manipulated like HYG...perhaps the fact HYG gapped down says more...?
High Yield Credit was in agreement today when the SPX was heading down and disagreement as it pushed back to VWAP (despite a red close). Again as I said above, " In other words, there appears to be a very fine line between a nice head fake upside move and entry and falling off a cliff."
Assets like 5-year yields short term, pro-sentiment short term, a little VIX suppression short term all argue for a short term head fake move higher while HYG and HY Credit argue for falling off the cliff, actually those are just two of many indications, but we were on the subject of credit, I thought it would be reasonable to point out why I said what I said.
Market Breadth... Which is what I mentioned , actually spotlighted in the Daily Wrap on July 31st, in my view was the entire reason for the August base, bounce and topping process now, here's the post...Daily Wrap July 31st. I think it's interesting and you can learn a lot by going back and seeing what we saw in advance, in fact every "Week Ahead" post since we have called exactly what the market would do the following week. However, back to breadth, it was bad back then which is why I was arguing for a base and a bounce on the night of July 31st, the base started the next day through Aug 8th and the bounce August 11th.
At one point during the base's construction, the percentage of NYSE stocks Above their 40-day moving average was at a mere 20%.
Look at what has happened to breadth since...
From the lows as the base was being made we saw breadth improve by 20% in 10-days, the last 10-days breadth has only improved by 3%, a huge difference. Almost all breadth indicators haven't moved for 2 trading weeks now. This is bearish, these are hard numbers and if stocks aren't regaining their 40/200 day moving averages, they aren't gaining ground and the bounce (as I've been saying) is essentially already over and in the reversal process just waiting on the final head fake which is not something we have strong 3C evidence for, it's a concept that we have strong historical evidence for, including the start of the bounce as it started with a head fake move on 8/8 before the next day when the move started on 8/11.
Also of interest today, Home Depot with a security breach...
As for the other nightly internals, there were several Dominant Price/Volume Relationships, again in this fractured market and highly unusual for this indication, there were no Dominant relationships among all averages.
In fact, the Dow was Close Down/Volume Down at 13 stocks, which is the relationship with the least next-day effect and the thematic relationship of a bear market. This is the one I call, "Carry on" as it really doesn't suggest a short term oversold or overbought situation.
The NDX was totally different with Close Up/Volume Up, which is the most bullish of the 4 relationships, but often creates a 1-day oversold event with a close lower the next day, this was 42 of the NDX 100. The R2K was the same relationship with 1084 and the SPX had no dominant relationship at all. We don't always have a Dominant P/V relationship, but when we do, usually all of the averages are exactly the same relationship... just more fragmentation of the market.
Of the 9 S&P sectors, 4 closed green with Financials leading at +0.30% and Utilities and Energy lagging at -1.04% and -1.33% respectively.
Of the 239 Morningstar Industry/Sub-Industry groups, 150 of 239 posted +0.01 or better, the rest were red.
One of the easiest to see indications of a reversal process other than price action itself (ROC) is the 10-days of market breadth essentially exactly thew same with no more gains, it looks like beyond a head fake move, that's the best the market could put together which is a bit scary for bulls as a 4% correction on the downside sent breadth (stocks>40-day) to 20% which is worse than most bear market readings.
The single share and less than 100 share (odd lot) action today (record setting) was also fairly indicative of the lengths they'll go to when all else fails (HYG, VIX and carry trades) to ramp the market.
I think we still have some good entries (NFLX and AAPL were two examples I showed you today), there are quite a few more, but like transports today, I think they'll come up at different times, especially with the fragmentation in the market. I don't see the head fake process lasting through the entire week, however it may last until the ECB meeting Sept. 4th.
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