Some of our single name shorts have done extremely well, these are core short positions (trend) that are still open, HLF which we entered on the biggest day up HLF has ever had, more than +25% on the day in to 3C distribution for a current short sale gain of +41.39%.
NFLX which had 2 separate entries has gains of +28.21% and + 17.90%.
SCTY short is up +24.96%, FSLR short + 34.86% and our core short in FB is up +13.62%.
However I see our best opportunities right in front of us.
Treasuries or the long bond outperformed and nearly tripled the Dow's full year gain.
In a bearish sign, the Treasury curve flattened significantly through 2014 with the 2 year up 28 bps and the 30 year down over 120 basis points. The flattening of the Yield curve or inversion has been an event that has preceded every US recession over the last 50 years so it's not a bullish event. Although many think the yield curve inversion is a prerequisite to a bear market citing the track record over the last 50 years, in Japan the flattening of the yield curve has been near useless in predicting recessions or bear markets, while it is there and happening, I wouldn't say it's a prerequisite, although we may not set a new precedent being it is flattened.
One of the things I thought made sense "Thinking like a criminal" and using Mass Psychological Analysis was for the Santa Claus rally that traders seem to think is their birth right, to suck longs in initially and then fail.
While there are several definitions of when a Santa Claus rally starts and ends, they are typically the week between Christmas and New years (starting the day after Christmas) or the day before Christmas for this year running until Friday, January 2nd. Either way, I thought an initial Santa rally or bullish market since we have had since the 17th in to the seasonal Santa rally and a failure, would set up a near perfect storm/bull trap.
By any definition of the Santa Rally, today's close puts all Santa Rally gains at a loss as was our theory.
In fact, it has been a RED DECEMBER for all of the major averages with the exception of small caps which our forecast was based on ( a head fake move above the R2K's 6 week trading range).
Yesterday, throughout the day we kept getting evidence suggesting a short term move to the upside that was weak and wouldn't hold, but useful for entering short positions you might be interested in as posted Tuesday, QQQ Update & Trade Set-up.
While I wouldn't recommend this sort of trade for everyone and I am far too busy myself to watch over such a day trade, I know more than a few members took the fade trade and called it an early day.
I had also posted early in the A.M. Update that the bond market closing at 2 p.m. (an hour earlier than usual) and may have some effect, "What's important for today as has been the last several days and years is the USD/JPY, especially with bonds closing at 2 p.m. today rather than 3, which will mean USD/JPY will have more influence".
While the Draghi news earlier in the day made the EUR/USD the pair to watch, it seems the bond market early closure did have an effect if you look at the major averages' performance after 2 p.m., although they were being led by EUR/USD, it seems to be more there than just that.
While EUR/USD took a dive and in doing so caused the $USD to strengthen and held USD/JPY relatively in place through the day, I think signs of a reversal of that situation continue to build.
While the Index futures closed ugly, they are seeing a small 1 min positive divergence, perhaps a small oversold bounce, perhaps it's nothing, but I'd use any strength to sell/short in to.
As we generally see, 3C divergences in the averages tend to pick up where they left off at the cash close, all major averages are leading negative or in line to the downside, suggesting tomorrow see additional weakness, at least early in the day , and there's nothing on any charts in the longer 2, 3 or 5 min ranges that is positive so there's not much at all to even suggest a bounce other than the 1 min Index futures and that is a small signal for a long overnight session. You saw the charts, this market is in an ugly spot.
Just look at the daily close...
However, we don't want to take anything for granted, I believe 100% that Wall St. will never make the trade easy or obvious and will try to shake you out, engage the Buy the Dip crowd, etc. All of this can be used to our tactical advantage, but that means keeping an eye out for it and not just assuming the market is going to hand you an easy victory.
There is one thing that could lead to a short term correction on a 1-day oversold basis, that's the Dominant Price/Volume Relationship in which all 4 averages came in at Close Down/Volume Up, like a mini selling climax or capitulation event. Of the Dow components, a massive 28 stocks were in the category of the 4 categories. Of the NDX 100, 71, 919 of the Russell 2000 and 323 of the SPX 500, that's a Dominant relationship and most often results in a bounce the following day on a 1-day oversold basis.
In addition, all 9 of the S&P sectors closed green with Consumer Discretionary doing the best at a loss of -.40% and Utilities lagging at -1.81%.
Additionally, only 19 of the 238 Morningstar groups closed green, that normally would be taken as a massively 1-day oversold event with a green close the following day, however beyond that, it carries no traction.
Of leading indicators, the VXX and VIX slightly outperformed the SPX correlation. The SPX caught down to TLT's bearishness or said another way, the SPX caught down to yields negative short term dislocation, although on a longer term, the SPX has plenty of downside to go. The SPX also caught down to HYG's bearishness short term, although it is significantly dislocated on a longer term basis and still has a lot of downside before the SPX catches down.
Interestingly both our Pro Sentiment indicators outperformed the SPX's correlation, again suggesting a short term 1-day oversold event and corrective bounce.
While I don't have any positive divergences outside the 1 min Index futures which could easily be wiped out overnight, there are more than a few short term signs of a 1-day oversold event which "usually" results in a next day bounce, however many things change when fear picks up with volatility which go hand in hand.
I wouldn't make any assumptions beyond I'd certainly look to use any price strength to sell or short in to, I would not try to chase anything to the upside, the probabilities are just too skewed to the downside.
Under "normal " circumstances, I'd put the probability of a 1-day oversold bounce tomorrow very high, but these are not normal circumstances with the degree of negative divergences we have. We'll watch for anything that can be used to out advantage and after I get back tonight I'll check the futures to see if anything has changed near term probabilities.
Have a safe and happy New Year.
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