Daily Wrap

More Central bank jawboning today as Chinese markets were able to act on Friday's PBoC Deposit and Lending Rate cut (to 2.75 and 5.60 respectively) as they were announced after the close of Chinese markets sending Asian markets in to the green this morning and more ECB jawboning, this time not from Draghi, but one of his minions, it's ALL about inflation (low inflation) and the ECB's "willingness to act to bring inflation in to line, however that has not included the words "Sovereign bond buying", which again (as always) is against the ECB's charter, however the market is not about reality, it's not about value it's about perceptions and management of those perceptions so if algos buy on ECB jawboning regarding inflation, those algos have set the perception that it means sovereign bond buying, despite the fact that it's not legal for the ECB and the Bundesbank is highly unlikely to go along. That took care of Asia (on real monetary action, that the PBoC said was a "Neutral" action, not a liquidity inducing action,although it did have the effect of re-pricing of fixed income products this morning. The ECB jawboning and algos took care of Europe, but as we saw in to the open, the SPX futures and in retrospect the Dow futures were both already negative premarket while the Russell 200 and NDX futures were in line with their trend.

Interestingly Friday our Dominant Price/Volume relationship was Price Up/Volume up, the most bullish of the 4 possibilities, but the Russell 2000 was the only average that had no dominant theme and the SPX and Dow had the most component stocks in that relationship. The typical PU/VU next day reaction is lower because of a 1-day overbought effect as we also had 9 of 9 S&P sectors green and 197 of 238 Morningstar Industry/Sub-Industry groups green, creating a 1-day overbought effect that usually has the next day effect of a red close, THE DOW WAS ABOUT AS CLOSE AS YOU GET TO THAT AT +0.04% and the SPX wasn't far off at +0.29% vs the Russell 2000 at +1.24% 

The ES and Dow Futures stayed in line all day and essentially flat from pre-market divergences whereas the NDX and R2K were in line and kept moving that way, although the NQ/NDX futures did see a large intraday negative divegrence through the day.

 NQ/NDX futures were in line before the cash open, they did see quite a nasty 1 min negative divegrence intraday that leaked over to the 5 min chart, making it that much stronger, which may continue migrating to longer charts overnight.

 The 5 min /NQ has a deep leading negative divegrence through regular hours today as you can see, adding to the negative already in place from this morning and late last week.

 ES 1 min stayed in line with the negative from pre-market, thus had very little movement and the intraday negatives responded with moves lower. This too moved further in to the 5 in chart where it is a more serious divergence.

ES with a Thursday a.m. positive (our long fade trade) and leading negative in to Friday and through today.

TF 1 min is in line, but 5 min is negative.

As for the Nikkei 225 futures I'm expecting to continue a move lower started last Sunday night on GDP/Quadruple dip recession...

Nikkei 225 Futures with last Sunday's negative in to GDP and the continuation of a further negative after the expected dead cat bounce.

 The 5/7 min charts look like this is a pivotal point for NKD futures as for intraday overnight, they are in line...

1 min NKD futures.

There weren't a lot of smoking guns today, the divergence in relative performance between the averages was one of the biggest red flags, but that doesn't mean nothing happened. For starters you saw the TICK Index, very little market breadth today, almost completely contained between +/- 600 except the last 30 mins of trade when the first trend of the day showed up on a ramp higher in to the close.

HYG/High Yield Corporate Credit is one I'm still watching carefully after the 1-day positive divegrence last week sending it higher, but thus far it has seen intraday distribution chipping away at it. As for a market lever, not so much for the SPX...

HYG (red) vs SPX (green) saw in line support from HYG late Friday , but today HYG diverged more and more away from the SPX.

As for HY Credit,

It saw a late day sell off vs the SPX (red) in yellow.

Treasuries were bid as mentioned and the 2 year auction came off strong today...

 TLT vs SPX (red) intraday, not your normal correlation in a risk on equity move.


 The 30 year yield (which moves opposite the 30 year bond and tends to pull equity prices toward it) has seen the strongest move down in weeks, even though it is massively dislocated to the downside through the October rally.

Here's 30 year yields intraday vs the SPX (red), diverging to the downside which should put some pressure on equity prices.

 And again, the pick up to the downside in 30 year yields the last 3 days as out TLT long (via TBT short) is looking good for a move to the upside.


The 5 year yields we normally use as a leading indicator are both big picture dislocated from the SPX's October rally trend and locally again today as yields moved lower, once again the market tends to be attracted to yields like a magnet so this is not supportive of this shortened holiday week, although the ultra-low volume is, unless of course volatility picks up which we'll get to.

Our pro sentiment indicator sold off in to the close and many Leading indicators including HY Credit were leading negative as well, both short term and big picture.

As for breadth, not too much has changed, but yet again for now the 17th day, breadth indicators like the Percentage of All NYSE Stocks Trading ABOVE Their 200-Day Moving Average remained flat, 17 DAYS NOW!

This indicator (green) vs the SPX 
(red) should move higher with the market showing improving breadth, as you can see it moved from approx. 72% to 74% and then fell apart hitting lows at the October lows of a mere 25% and currently with a new high at a mere53.5%, nearly half of NYSE stocks are trading BELOW their 200-day and there has been zero improvement for 17 days.

However one of the most interesting volatility inducing signals continues to be the VIX itself, closing at 2 month lows today.

 VIX with my custom buy/sell indicator based on DeMark principles with only 2 signals this year, a sell at the highs and a recent buy with Bollinger Bands continuing to tighten implying a highly directional move, I doubt very much that directional move is down, especially with the buy signal, but a close under the bands and back inside would be a very interesting signal for the VIX and a big move to the upside.

As far as probably the most interesting indication tonight, the SKEW Index has gained again today, that's now 16 percentage points in 3 days as it is solidly in the red zone above 140. A few other times it was above 140 this year was 1/17 at 139 and the Russell fell 7.5% from 1/22 to 2/16.
Again on 7/3 at 142 , the R2K fell nearly 8% from 7/3 to 8/1, then again on 9/19 at 146 in which the R2K fell from 9/2 to 10/13 (October lows) over 11%.

This is clearly a hedge, but it's deep out of the money puts that are only worth something if there's a sharp move down and it has had a pretty good correlation with T2K corrective moves this year, however it's not built (CBOE) for corrective move, that's why it's called the Black Swan Index.


As for internals, the Dominant Price/Volume Relationship was in all 4 major averages with 13 of the Dow, 860 of the Russell 2000, 252 of the SPX-500 and 69 of the NASDAQ 100, the relationship is CLOSE UP/VOLUME DOWN. This is the most bearish of the 4 possibilities.

In addition, 5 of 9 S&P sectors closed green with consumer discretionary (no surprise) leading at +0.93% and Utilities lagging at -.83%. Of the 238 Morningstar groups and sub-groups I track, 182 were green today, that's pretty overbought, although the S&P sectors not so much.

The Dominant P/V theme is not as strong of an oversold as Friday's, but it is the second strongest oversold, often with a next day close lower.

I'll be watching futures tonight, especially the Nikkei 225. The USD/JPY has already taken quite a hit on an intraday negative divegrence after the close.

USD/JPY negative divergence at this week's highs sends it lower.

I'll update you if I see anything of interest. Of course I opened the FXP position today so I am expecting some weakness to show up in ASia very soon, and as I laid out last Sunday, I think the Nikkei 225 was the first crack that ripples through the US futures.