Daily Wrap

"Dull markets are dangerous markets", how true that was today and I don't think we're even close to clear of this mess. Let me take you on a little tour from NANEX, they gather and analyze all kinds of HFT market data...

First , some strange VIX futures accumulation when you'd expect them to be winding down VIX futures now that the F_O_M_C has passed.

 Massive VIX Futures accumulation BEFORE the market broke, this is a 60 min chart, for it to lead like that, there's some large underlying flow of funds.

Even intraday the shorter 5 min chart that we watch for timing indications had been accumulating , but well before the market anomaly. As I said earlier, "Either someone's a fortune teller, just very lucky or...?"

 This was followed by a headline out of Japan that the country's Pension fund, GPIF, will increase stock allocation in the fund to 25%, the problem is, this is almost a 2 week old piece of news. I wrote about the very subject on Monday October 20th in A.M. Update...

" Japan announcers the GPIF (Japan's pension fund) will increase its stock allocation from 12% to 25% overnight "

Perhaps Headline scanning algos are just that dumb or perhaps... ? In any case, the result was a spike in the USD/JPY...

USD/JPY

And I'll let NANEX narrate from here...

Actually one of the first events was crossed and locked quotes. While we typically think of the exchanges and liquidity providers being NASDAQ or NYSE, in reality there are numerous pools of liquidity like BATS, Bloomberg TradeBook, Instinet, Archipelago, SuperMontage, etc, all ECN's of liquidity, but they are suppose to aggregate at the best bid and ask which is what you see when you go to place an order (this runs deeper like level two or TotalView) and even more sophisticated ways of seeing the "depth of the book".

So one of the first things that happened were locked (the bid and ask are the same, often resulting in the inability to place a trade) and Crossed quotes  in which the bid is higher than the ask, assume a $10 stock is bid at $10.50 with an ask of $9.50, that's a crossed market.
From the University of Mississippi's Business Administration's report on Crossed/Locked markets...

 "Locks and crosses usually accompany significant price changes." This isn't a matter of supply and demand, it's a matter of broken markets.


One of the first events was a very strange SPX-E-mini  Futures trade first reported by NANEX 

This was a huge market moving "trade" or apparent trade.

 As the depth of the market breakdown was, it started to become apparent this was ne of the worst breakdowns we have seen.

I have long advocated that a bear market decline with HFT's pulling all liquidity would exacerbate the decline and result in broken markets that would cause people to panic and prices to drop even faster. We've seen numerous incidents this year of markets breaking even when volatility was running around price moves of a quarter of a percent on the day earlier in the year, so what happens when a real emotional panic sets in and HFTs pull all liquidity?

It's becoming clear that crossed and locked markets were just the start, and all on a nearly 2 week old headline.

Here NANEX thinks the E-Mini trade that lifted the market was not an actual trade, but a "Screw Up" caused by the market exchange problems.

The NYSE quotes went dark and only NASDAQ stocks were still being quoted. It was reported that in some cases, including within Dark Pools that some orders were being filled with 60 minute old quote data.

It's now clear the E-Mini SPX trade was not an actual order, but an anomaly caused by the breakdown across various markets, thus much of today's climb higher was based on mistakes and broken markets.

1) nearly 2 week old Nikkei headline
2) huge E-mini volume
3) market breaks
4) SPX fails to break 2000
5) Market resumes

It's difficult to rely on data for analysis right now until whatever can be restored or revised is, but there were notable divergences today.

HYG distribution of the last 2 days is taking a toll.

 HYG led the market perfectly until this divergence which is the bigger story, this is one of the best leading indicators we have, "Credit leads, stocks follow", that's how the rally began, with HYG accumulation.

However intraday, HYG followed or led the market, the same is not true today.

HYG vs SPX, totally flat.

Even more interesting, the un-manipulated HY Credit is diverging badly right at the rounding Igloo/Chimney top, this is a signal I've been on the lookout for.

 Pro Sentiment continues to diverge vs the SPX...

And recall yesterday's advice to follow the 50 year yields as they lead the SPX? Look at today's divergence and that's not even including the larger strategic divergence.

Every time the SPX has made a move higher and 30 year rates didn't confirm, 30 year rates were right which makes this larger strategic divergence important and today's more tactical one look like an excellent timing indication.

The markets were highly fractured today as well with the Dow leading at +1.30%, but of the 221 point gain, 145 points of that was due to Visa. The NDX lagged at +.25% and the Dow Theory concept of Industrials vs Transports for confirmation/non confirmation is looking bad for the market.

The Dow 30 in red and Transports in green on their second day heading lower, no longer confirming the Dow or the market, in fact closing -.86% lower despite oil down over 1.5% today.

While I'm going to wait a bit until data is restored and I can see indicators as they were meant to be without the distortion of the blackout, I'll leave things here, but these divergences above, not even including 3C should be taken seriously.

I'm not sure how much I trust the Dominant P/V relationship, even though all stocks were trading by the close, if we do, there was a massive Dominance in Close Up/Volume down, the MOST bearish of the 4 relationships and also one that typically causes a next day close lower, which I'd anticipate anyway with op-ex tomorrow, after all most contracts are likely call and to cause them to expire worthless, a pin to the downside would be what the doctor ordered.

8 of 9 S&P sectors closed green, however the leaders were defensive Utilities followed by defensive Healthcare with Energy lagging.

Stocks above their 200-day moving average remain below 50%, meaning about half of the market of stocks is in a bear market, the averages won't hold up with no support from stocks.

I'll bring you more as I can be sure I can trust the data, but the divergences above like Dow vs Transports, HY Credit, HYG, 30-year rates and more and especially the odd VIX Futures accumulation are all screaming something's up, that's the message of the market from what I can see.