"Going through the charts, there's a lot today that looks similar to yesterday, which is to say quite a few newly formed divergences have been either run-over like yesterday or deteriorated pretty badly.
Today there was more deterioration, although not to the same degree as late last week. The only average I didn't notice deterioration of meaningful significance (or I should may have had some deterioration here or there, but made up for it on stronger charts) was the IWM which is the reason I chose it as a bounce candidate for early this week, Trade Idea: Short Term IWM Calls. The IWM's +0.48% gain today trounced the other averages leaving that trade idea at a nearly +14% gain today.
Right now, the 1 min charts for the averages and Index futures are negative. There are scattered positives, mostly in the 2 min area, a few out to 3 min and the IWM has been able to maintain a 5 min positive looking signal, but not quite a clean, clear divergence. The IWM 5 min positive looks better today as a leading positive, even though it moved in line with price. Just the added extra day makes the divergence look more defined. I mention this to contrast it with the 5 min SPY which is just seeing more damage today.The SPY 5 min chart remains in leading negative position, but didn't improve or deteriorate today, if it is zoomed to intraday view, it would appear to be in line all day, even though it is in leading negative position from last week's damage. It has been a while since I've seen this kind of activity, but I'd say there's a real sense of fear and the hedge fund herd that usually moves together, seems to be breaking up in to an every man for themselves or "Whoever sells first, sells best" mentality. I believe that's why it has been so difficult to hold together positives that have formed.
I was a bit surprised this morning to see how much opening damage there was on the TICK chart,
HYG is still supportive of a bounce, although the asset itself has seen deterioration which I showed in last night's Daily Wrap; whatever deterioration was on the charts in last night's post, you can pretty much triple that today, yes, massive deterioration in HYG so I am amazed it's still able to hold in position. The exact same was seen today posted this afternoon FIRST Utilities outperforming, now VIX
In fact, any bounce from HYG may have been held back by some minor strength in VXX and TLT as they counter HYG is the SPY arbitrage which was eerily near perfect today.
It's my opinion based on F_E_D communication and the way the 3C has acted since SPX 1900 was crossed (along with these right shoulders everywhere) that the F_E_D / F_O_M_C next Wednesday is going to do or say something to pop the exuberance they see in the market or perhaps better said, the lack of volatility (fear), I suspect it will be subtle so they aren't charged with manipulating the market as we all know they do, but they are clearly unhappy suddenly with the lack of respect for market risk.
The bounce I had envisioned considering I used a partial IWM call position with expiration next Friday, would be along the lines of pre-F_O_M_C and looking at the market as a whole, right now I can't say that I would expect much. In fact I am starting to wonder if it is even possible given it seems any kind of underlying strength that builds is so quickly torn down. Which was the case to a lesser degree again today, but the end result is the same, SPX +0.09%, Dow-30 +0.03% and NDX +0.12%, just about in line with Friday's expectations except for the IWM which the call trade was opened in at a +0.48% gain.
Last Friday I said I expected the head fake move that began on 5/23-5/27 to start to be resolved to the downside this week, thus far, that's exactly what has happened.
From what I see right now, I'd expect a pre-F_O_M_C relief bounce and the move to really start generating downside momentum, however as to any bounce, I don't think (at this point) you can count on positive divergences much past 3 mins, meaning I think you'll need to be nimble to capture gains and likely need a fair deal of leverage to make it worth the risk this was absolutely true today, while also pre-defining that risk to a tolerable level which you can do with options as the premium paid is the maximum risk.
Beyond that, there has been an exceptional amount of damage done this week and I'm talking about damage being done while the market has lost ground as we usually see distribution in to higher prices, this week we have seen it in to lower prices as well, which is what gives off an aura of panic."
END OF QUOTE...
Along the lines of panic, while nothing was as obvious today, there were negatives in the averages on what would otherwise be expected to be an in line day with so little movement... The outperformance of XLU +0.66% (the safe-haven trade of Utilities) was notable, even though our earlier fade trade was working, again you needed to be nimble and use significant leverage.
OF THE S&P SECTORS, Only Utilities and Energy finished with any sort of gains at +.68 and +.60 respectively, the Energy gains likely related to the ongoing insurgency in Iraq (borderline sectarian genocide). The biggest loser of the S&P sectors was Financials, down -0.49% which I mentioned earlier in the day for a possible bounce along the lines of the IWM options trade from Friday, however only XLF has any positive divergences and only clearly out to a 3 min chart, missing the 5 min mark which is the minimum timeframe for a trade. Furthermore there was no confirmation whatsoever in FAS, FAZ, SKF and UYG (although I'll keep it on the radar). This happens to be one of the sectors I believe will suffer the most with the end of real QE that is able to generate the trading incomes these banks have seen the last several years and with the loss of the traditional banking model as mortgages have plunged as well as Corp. loans (to Lehman era levels).
Also noted was the outperformance of VIX, largely attributed to the F_O_M_C (but I'd have to see the same tomorrow to believe that)...
With everyone short volatility as the VIX has seen 75 consecutive weeks below its long term average, a rate not seen since 2006/2007, "if" the F_E_D follows through with action on what they've been talking about, a massive squeeze in volatility would send the market much lower, especially considering the "Short volatility trade" and the fact that the Dow is only up 1.24% since Dec. 31st, 2013 to today's close; the SPX +4.84%; the NASDAQ Composite +3.45% and the "Market Leading " Russell 2000 only up +0.28% during the same timeframe, while the VIX has spent 75 consecutive weeks below its long term average, a record not seen since 2006/2007. The resulting squeeze in volatility could be sharper than most expect and there are hints that smart money knows this, not only the extremely sharp negative divergences since the market crossed above the 3-month SPX range which we expected as a head fake move and so far has been verified as one, but action in VIX Futures I've been tracking are now leading positive out to a 60 min chart.
Also ironic is the timing of this move (in its entirety and also recently) as it just started turning last week, a week in front of the F_O_M_C meeting.
May of 2013 during a F_E_D meeting, the Advisory council stated they had, "strong concerns over its low interest rate policies and bond purchasing program", we know one end of those concerns have been handled with the taper of QE. The council went on to say, "this could lead to unmanageable inflation and an unsustainable bubble". Here we are a year later and F_E_D members are speaking openly about the council's second concern.
The F_E_D has been transparent in the past in stating their objective to create the "wealth effect" via the markets, while perhaps a well-intentioned idea (or perhaps not, you probably know by now I believe QE was nothing more than a stealth bank bailout), it didn't work, even today's beat in the Empire F_E_D coming in at 19.28 vs. consensus of 15, had it's dark clouds, specifically the employment index which fell from 20.88 to 10.75. The other apparent failure is capital expenditures, while many companies "say" they feel better about them, what they have said hasn't translated in to investment in new equipment, rather many seem to be turning toward the short term investor sugar rush of buybacks instead.
Some recent comments from F_E_D members on the state of the markets:
"One of the things that concern me is there is almost no volatility in markets... low volatility is unhealthy"
"This indicates to me a little bit too much complacency that [interest] rates are going to stay at abnormally low levels forever"-Richard Fisher president of the Dallas Federal Reserve Bank
"Volatility in the markets is unusually low,... "I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they'll take more risk than really what's appropriate."
-William Dudley, president of the Federal Reserve Bank of New York (also a known member of Janet Yellen's inner circle).
Hinting that the expected F_E_D Funds rate "may not" be at zero until mid 2015 as the market now expects, Janet Yellen (after the F_E_D moved policy guidance from quantitative to qualitative, essentially allowing them to make it up as they go) recently said,
"It is important to note that tying the response of policy to the economy necessarily makes the future course of the federal funds rate uncertain,"
Yellen was essentially telling the market, in turning to qualitative guidance, the market shouldn't make assumptions that the funds rate will be at zero until mid-2015, which is what fuels low volatility and complacency in the markets.
And Kansas City Fed president, Esther George, a skeptic of keeping rates low for an extended period recently said,
"My concern is that keeping rates very low into late 2016 will continue to incentivize financial markets and investors to reach for yield in an economy operating at full capacity, posing risks to achieving sustainable growth over the longer run,"
Even the WSJ and F_E_D's unofficial mouthpiece, Jon Hilsenrrath wrote a piece about the market's complacency and the F_E_D's concerns about it.
In any case, it's a fool's game to try to predict what the F_E_D may do Wednesday, but in my view considering how vocal they have been, I think they've been warning the market. The underlying 3C trends in the market, especially recently as well as VIX futures, seems to indicate to me that someone heard them loud and clear, obviously someone/s with deep pockets as these are large and extreme divergences.
