"While I can't pinpoint the exact moment, my guess is HYG is used to boost the market, maybe even our head fake move because the market itself just doesn't have the positive short term divergences to do it alone. However after that, I'll say HYG will be headed straight back down and I'm guessing this happens before the policy announcement on Wednesday. Judging by the scramble toward our set-up targets in several of our short set up plays today, despite a red market, it looks like they are in a hurry to get that move in place and I suspect HYG is going to help early in the week and then retreat before the market.
So rather than last week's "More of the same" sideways chop, I think the SPX's downtrend of lower highs and lower lows I have posted several times this week is a target for technical traders and HYG will likely sponsor the move"
This is exactly what has happened. Then our Important Market Update Post later Friday, with the simple..
"*If you miss everything else, don't miss the breadth indications near the bottom of the post."
This is because breadth had deteriorated so badly on a short term basis, a market bounce on a short term basis was the gist and thrust of all the breadth charts for near term activity this week, however, something much uglier stepping back and looking at the big picture.
HYG led the move as expected just as it has led every move since late July with uncanny accuracy...
This is the SPY in green and HYG in red today, a near perfect correlation as expected for almost a week.
The AUD/JPY which gave out yesterday also saw leadership as Chinese QE was unleashed to 45 major Chinese banks (more on that), but $AUD is the currency that will react to China especially the dismal data coming out, make sure you see this morning's A.M. Update for more details on the situation in Asia and the horrible performance.
AUD/JPY (candlesticks) leads ES, but look near the end of the day as ES stays in line with HYG rather than AUD/JPY (AUD/JPY dips).
A great many of the stocks we have set-up plans already put forth are doing what we need or want them to do, for instance...
Others on our list like SCTY...
Look ready for a move, however this is a small positive next to the negative and the longer term negatives making this an excellent entry opportunity, exactly what we were looking for not only this week, but conceptually from the August cycle's head fake move which we are still waiting on.As I said earlier , a F_O_M_C knee jerk reaction may get us there, but at the same time, beware of the knee jerk reaction as they almost always turn out to be wrong or faded.
The SPY even broke to our minimum target that will get bulls off their butts and chasing stocks, to distribute or sell large positions short, you need retail demand and the break above the channel mentioned last Friday in the "Week Ahead" post, was exactly what we saw today.
From Friday's post...
" I think the SPX's downtrend of lower highs and lower lows I have posted several times this week is a target for technical traders and HYG will likely sponsor the move"
And today's SPY move above the technical channel and on volume, EXACTLY what was needed to get technical, retail traders to chase and create demand.
Surprisingly, there was barely a short squeeze, or VERY week. Our Most Shorted Index...
The SPX in green pops today, but the MSI in yellow is really of no help at all. In fact, on a relative basis it's lower!
The HYG ramp and AUD support along with some helpful Hilsenrath/China headlines were still not enough to get the NDX or Russell 2000 green on the week. From a "Technical" perspective, there's been a lot more chatter about a R2K death cross in which the 50-day moving average moves below the 200-day. You may recall last night's post on the internals of the NASDAQ Composite as well as the Russell 2000, Daily Wrap.
The SPX hit 2000 but couldn't hold it closing at 1999, but we still have a possible (maybe even probable) knee jerk from the F_O_M_C tomorrow if Jon Hilsenrath actually has an inside line that the "Considerable Time" language or guidance really won't be changed which is partly what the market has been so concerned about going in to tomorrow's F_O_M_C policy statement at 2 p.m. Then we have a Yellen presser and to add more volatility and unknown factors, the Scottish independence vote Thursday.
As shown earlier in the Leading Indicators... update, almost no leading indicators supported this move including my newest Russell/SPX ratio, failing to confirm, HYG even gave out a bit toward the EOD holding the market back from ramping the close. While our professional sentiment indicators were looking ugly most of the day, they looked better in to the close which is one of several reasons (mostly 3C of the watchlist, the averages and HYG) that I think we have some more upside to go on this move.
As mentioned several times the last 2 days and as recent as last night , yields did do what we expected or rather the market closed in on them as we have used them for a long time as a leading indicator.
Here we have near perfect reversion to the mean as the SPX is pulled to yields.
Also as shown earlier, High Yield Credit (other than HYG) was not buying the move today, the environment is near perfect for entries in to our watchlist stocks (entry levels or alert price levels for many posted today, Here they are...).
The Legacy Arbitrage we suspect in the $USD seems more real today as commodities (shown last night) surged on a weak dollar today led by oil and coper. It seems more and more like the correlations and dynamics are returning to pre-F_E_D accommodative policy.
We had been seeing signs of a $USDX decline last week, today was the worst $USD decline since May, however, interestingly in front of the F_E_D, we have an interesting $USD divergence...
Today's $USD weakness is obvious, but interestingly there's a positive divegrence in to today's weakness in front of the F_O_M_C.
As for China's "Stealth QE", credited with sending the market higher around 11:30, around the time the Hilsenrath / WSJ story about the F_E_D not messing with the guidance timeframe vocabulary. I thought something was strange about that as HYG's correlation was much tighter and a bit earlier, it turns out the China Stealth QE has been announced during thee Asian session much earlier in the day!
In any case, China put out $500 bn CNY to the 5 biggest Chinese banks ($100 bn CNY each) for what I believe is a 3 month period as China's banks have been having liquidity problems. The last time China pr the PBoC did something like this, it was July 28th and used a new facility called the "Pledged Supplementary Lending" facility, in which China Development Bank was the recipient of a Trillion CNY! Here's how that QE episode ended if you're curious...
The Pledge of $1 trillion CNY to China Development bank on July 28th and the next two days ugly with the 31st seeing the SPX down 2%, which is the day in which all of the August cycle was first revealed in this post on the night of July 31st...Daily Wrap , Personally I think it's quite revealing and educational to go back and see what we were seeing when the future was the right edge of the chart, especially in the context of breadth which is one of the biggest factors to extreme market weakness just lurking below.
As for market breadth, one of the most interesting indications in the market and probably one of the most overlooked...
Dominant Price/Volume Relationship (this is not the relationship for the Index, but the component stocks that make up the index).
As you might expect with weakness on the day in the R2K on a relative basis, there was NO Dominant P/V relationship. The NASDAQ 100 had a co-dominance of Close Up/ Volume Up and Close Up/Volume Down. I can't count this as it's not dominant. The SPX had 258 in Close Up/Volume Up and the Dow had 20 in Close Up/Volume Up, which were the only 2 Dominant P/V relationships. This is the most bullish of the 4 possible combinations, but often leads to a 1-day overbought scenario with the averages closing red the next day, however being a wild card F_E_D day and the fact it was not Dominant through all 4 major averages, I think I won't put too much stock in the reading, but in the days ahead, it will be important to remember.
Nine of Nine S&P sectors closed Green with Healthcare leading at +1.37% and Financials lagging at +0.43, however, this relationship is similar to the P/V (DOW/SPX) in that it often signals a 1-day overbought condition with the close the next day being red. Again, the F_E_D wildcard is a bigger issue.
Again on another (normally overbought basis), of the 239 Morningstar Industry/Sub-Industry groups I track, 190 of 239 were green. Any other day than the F_O_M_C tomorrow and I'd say we've reached a 1-day overbought condition. This however is revealing, especially if we get an F_O_M_C knee jerk reaction tomorrow at 2 p.m. to the upside and have the same kind of breadth indications and some stronger negative divergences in HYG, the averages and our watchlist stocks as this would signify that what we have expected has not only come true to the letter, but is moving toward the decline/stage 4 phase, especially if the Market makes the head fake move in stage 3 of the August cycle.
This is the "Igloo with a Chimney" top I have mentioned so often, in fact as recently as today in the Asset List post with the chart from that post looking like this...
We already have the rounding reversal process, the head fake move is seen about 80% of the time in any asset and any timeframe, although the larger the technical price pattern and more noticeable as well as the more watched the asset, the more likely the head fake move which would put this one at a very high probability as we have been looking for it ever since HYG entered stage 3 and the SPX only a few days behind.
The SPX is getting a lot closer to it and HYG still has gas in the tank as do most of our watchlist candidates, it really comes down to a possible hawkish F_E_D surprise which may be difficult as the market has already expected a hawkish tone, which Hilsenrath threw some cold water on today.
A little closer to that "Igloo with a Chimney", which happens to be one of the best downside reversal timing indications we can ask for as well as setting up our Trade-Set-up entries at some better price and risk levels.
Finally, Market Breadth in our Breadth Series indicators. Stocks 1 Channel (Standard Deviation) > 40 day moving average (momentum stocks) improved ever so slightly today by 4% points to 19 from 15% yesterday, still well below the 2014 average of 55%.
Stocks 2 Channels (Standard Deviations) > 40 day moving average (real momentum stocks) improved by less than a percentage point, actually dismal performance and are in a world of hurt, this is the decay of the pier pilings those strolling the pier of price don't see.
It's not just the pathetic move today which is as good as n move at all (as the MSI showed no short squeeze of any value today), it's the bigger picture in the yellow area showing how damaged this market is, it's no wonder nearly half of the NASDAQ Composite and Russell 2000 stocks are in a technical bear market.
Stocks above their 40-day moving average improved from 34.68 to 39.17, another anemic move in the standard of market breadth, this down from an earlier 2014 average of between 70 and 80%.
There were no breadth indicators that showed anything interesting in repair on the upside today and the NASDAQ Composite's A/D line was virtually flat despite a gain of +.75% today!
In summary the Chinese Stealth QE is a virtual non-story except to point out what we already know from economic data and stock performance, they are hurting bad, why do you think the liquidity injection today went to the 5 largest Chinese banks and we saw how it played out last time.
The Hilsenrath story regarding F_E_D potential changes to forward guidance vocabulary may have more legs near term, but the street talk is still expecting a more hawkish F_E_D and could be disappointed if they do modify forward guidance.
From our perspective, we have been patient during stage 3, only adding short positions (and a few longs) when they had strong objective evidence. From here, it's just about letting those watchlist stocks make the move we hope to see and following the negative divegrence right in to our entry, so long as the market's divergence and HYG's doesn't fall apart first on a F_E_D wildcard hawkish tine tomorrow.
Remember, anything F_E_D related usually produces a knee jerk reaction that is almost always wrong, but it may be helpful in our case in entering some of these Trade Set-ups which I gave rough estimates of upside entry targets today.
We have caught F_E_D leaks a few times in the past, not that often, but when we do, they are obvious so I'll be watching the last 3 hours before the policy statement for any signs of such leaks as the media has the statement on embargo in advance so a leak is not that hard and the F_E_D themselves were caught red-handed leaking minutes almost 2-days in advance to major institutional players and private equity firms, 154 in all, almost 2-days in advance and by email!
As I've said many times today, SO FAR SO GOOD. We're right on track.
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