The Week Ahead.

I've been looking for the exact link, although I can't spend too much time, but apparently not wanting to get caught off guard  again the F_E_D is already warning the ECB (as I said earlier, I suspect the BOJ's QE decision will not be something the F_E_D welcomes as the September minutes made VERY clear the F_E_D is concerned about a strong $USD, apparently over Global Growth concerns or at least that's the party line). 

As per MNI Market News:

• ECB SOURCE SAY EUR3 BILLION BALANCE SHEET TARGET NOT IN THE CARDS: MNI
• ECB SOURCE FED HAS NOTICED EUR SLIDE AND ECB MUST NOT PUSH TOO FAR: MNI

You may recall at 2 p.m. Wednesday (F_O_M_C) the Euro took a swan dive exactly at 2 p.m., sending the $USD rocketing higher. The apparent implication were traders were looking to the ECB to carry on the QE torch which I have explained is no simple affair of just making the hard decision for the ECB, it will be challenged in court without the equivalent of a constitutional amendment as the ECB's charter bars them from financing any country's debt, that means no buying sovereign bonds like the F_E_D bought US Treasuries which they are even forbidden to do in the primary market so they had to use the process of POMO to buy from Primary dealers in the secondary market.

The F_E_D seems to be sending a message to the ECB not to even think about QE as the BOJ just did (well expanded it), the reason is what I suspected earlier when I said I know that from a cynical point of view, the timing looks like the F_E_D passed the baton to the BOJ, but from a realistic point of view, the Japanese pension fund is dumping Hundreds of Billions of dollars of bonds in to an illiquid market and no one else is going to buy them save for the BOJ,  that's what I believe this QE expansion was about and it causing the $USD to rise, in my view was not a welcomed development by the F_E_D.

It looks like we may be right as the ECB is responding by saying balance sheet expansion/QE is not in the cards and they were told the F_E_D noticed the Euro slide which was at 2 p.m. Wednesday on expectations the ECB will engage. So there we have it I believe, this was not a F_E_D/BOJ collusion, but a liquidity problem that would crash Japanese bonds (JGB's) when the Pension fund (GPIF) goes to sell them in to a market that has seen consecutive days without a SINGLE trade.

Thus this QE may not be as much stock market liquidity as the stock market acted like on the news, but more targeted to absorbing the GPIF's bonds that will be sold (from 60% of the GPIF's holdings to 35%-that's a lot!).

Apparently the news sent the EUR/USD higher , seemingly on "diminished QE hopes given the statements from "ECB Sources"...

There's not only a EUR/USD positive divegrence just before the story came out, but higher prices just after the divegrence.

I suspect we may hear more from the US and G7 over coming days with regard to the BOJ's overnight decision, I also suspect that the decision , as I've probably made more than clear, is an effort to keep Japanese bonds/ JGB's from absolutely crashing, thus while there is some stock specific good news for the Nikkei at least and maybe some others, it seems to me the thrust of the controversial decision (controversial in Japan and inside the BOJ as the vote was 5 to 4, as close as you get) is not what many first assumed, but a matter of need, not expansion of QE for QE's sake. The bottom line is, if I'm correct, the market will not view this as added liquidity, but simply a transfer of JGB's from the GPIF to the BOJ's balance sheet , if that's the case, it has no positive effect for stocks.

Another noted source just pointed out what we've been seeing most of the week, and certainly stronger yesterday and today, the quote was, "If this rally is so sustainable, why is everyone hedging in VIX Futures".

They don't have the benefit of 3C, it's just obvious as it was earlier in the week that the VIX is being bid due to it's stronger than usual correlation vs stocks.

 You have seen the VIX futures accumulation, the bid in VIX futures is showing up in VXX, short term VIX futures as it outperforms the SPX for the 3rd time this week (SPX prices in green are inverted so you can see what the normal correlation should look like).

As you can see, VXX, "should" have pushed lower on the SPX's push higher intraday, an apparent steady bid for protection is causing outperformance, but this is way more visible in the 60 min VIX futures.

 I didn't invert the SPX here on SPOT VIX because the difference was so glaringly large, I didn't think you needed it, just remember the VIX should be a near mirror opposite of the SPX. The red arrows point to the levels SPOT VIX "should" have moved to on the SPX intraday moves today.

As for HYG, as I said in mid October before the rally, "There's only 1 reason to accumulate HYG"  likewise, there's only 1 reason to distribute HYG. I mentioned I was concerned about the 1-2 min positive divegrence earlier in the week and speculated that the rounding top in place would see a head fake move higher forming the typical reversal pattern that looks like an Igloo with a chimney, I even drew it a day before the move higher started.

I also suspected it was a short term head fake move because HYG accumulation only went out to 2 min charts, very short term, small accumulation for a short term move.

 Here's the 2 min chart finally starting to go negative as it seems the Chimney I suspected based on nothing but concept and HYG divergences , is accomplished.

At 3 mins HYG is ugly, as I said, only out to 2 min with positive charts.

The 15 min chart shows the accumulation mid October when I said, "There's only 1 reason to accumulate HYG here), remember where we were, the Dow has just lost 1200 points over 3 weeks.

The 30 min chart doesn't even register the divegrence above, telling me it was a cycle move and as I suspected and posted numerous times before we had the first sign of a rally, "After a very strong move up which we can use to short in to, I expect a new lower low to be made below the October lows".

AS OF NOW, I STILL SUSPECT THAT TO BE THE CASE.

I often say, "Once Wall St. starts a cycle, they rarely abandon it", so if they are going to have any bullish reaction to the BOJ decision (which I'm starting to doubt more and more), it shouldn't be seen until they are at lower lows where they can accumulate on the cheap as there's NO sign anyone expected this move to be a probability,  with Goldman Sach, (A former  Japanese QE supporter).coming out and lasting the move this morning.
 

 HYG itself has been divergent , although it was perfectly in line for the majority of the mark up period.

Longer term as far as primary trends go, HYG has made nothing nut lower lows. When you see a chart like this and you know that Credit leads and stocks follow, I don't know how you can't automatically associate it with a breadth chart like this...

 The Percentage of ALL NYSE Stocks Trading ABOVE Their 40-Day Moving Average

As you can see, just like the deterioration in HY credit, EVEN WITH A FACE RIPPING RALLY...THE BREADTH INDICATOR SHOWS BARELY OVER 50% OF STOCKS ABOVE THEIR 40 DAY MOVING AVERAGE AND THAT'S AFTER A FACE RIPPING RALLY/SHORT SQUEEZE!

 Looking back further to see where we have come from, The Percentage of ALL NYSE Stocks Trading ABOVE Their 40-Day Moving Average use to trend around 88-90%, then 80% in 2013, then 76% and at record highs, just above 50%?

The Percentage of ALL NYSE Stocks Trading ABOVE Their 200-Day Moving Average shows the same deterioration.

I use to teach Dow Theory and an easy way to get an "about accurate" way of identifying trends was the 200 day as the primary and the 50 day and the intermediate. According to the chart above which is fact, more than half of ALL NYSE stocks are trading BELOW their 200-day moving average which we'd consider a bear market. Just before this move started 40% of the NASDAQ Composite was in a technical bear market and nearly 50% of the Russell 2000 was in a technical bear market with losses of more than -20%

There has been NO REPAIR HERE, this move was designed for one thing, change sentiment and shake out shorts as there were too many on the same side of the trade.

 Look at the NASDAQ COMPOSITE's Advance / Decline line, from confirmation as it moved higher to a series of lower lows, more and more NASDAQ stocks trading lower and lower

Near term, High Yield Credit has rolled over, something I've been waiting for as it confirmed the rally on the way up and just like the last bounce, we saw small inflows in to HY credit the week the rally started, now they are exiting.

 HY Credit Vs. the SPX.

And here's a broader look as HY Credit makes a series of lower lows at important ATNH's.

 As for the 30 year yield that has been leading the market, you see what happened every time the SPX and 30 year yield disagreed, the 30 year was right and stocks moved lower. The 30 year yield moved up with the rally as it should have, but has come unhinged and is leading negative worse than anything on this chart telling us what?

 Here's an intraday view, even during the rally, disagreements ended with the 30 year being correct, now it's more dislocated than ever in this rally and more than ever on a longer term basis (above).

 Pro sentiment continues to fall off and right where our rounding top was forming.

And my custom SPX/RUT ration makes no bones about it. the VIX Inversion (term structure) indicator shows buy signals, I said this is a big one and a big move is coming, but the SPX/RUT indicator seems to me the market's future is pretty well locked in, BOJ or not.

I EXPECT THE MARKET WILL FINISH THE CYCLE THEY STARTED AND FOR THE REASONS THEY STARTED IT, MEANING I EXPECT LOWER LOWS TO BE PUT IN AND I DON'T SEE THIS MARKET REACTING VERY WELL TODAY ALL THINGS CONSIDERED. VIX FUTURES TO ME ARE A DEAD GIVEAWAY THAT SOMEONE WITH VERY DEEP OCKETS IS PREPARING FOR THE NEXT PIVOT.

I'll have a near term market update out momentarily.