Market Wrap

To say today has to be one of the strangest days of intraday trade I've ever seen would probably be an understatement, the pin of the market was ridiculous, however I have to wonder whether it was a true pin through the entire day or to the normal 2 p.m. with the market just not having that follow through demand off Wednesday's F_O_M_C.

With the R2K the best performer at 0.36%, this wasn't exactly follow through, more like market noise, in fact market noise is usually at least a half point (+/-.50%), the Dow and SPX at +.018 and 0.19% respectively and the NASDAQ 100 at a mere 0.05% which is just about as close as you get to unchanged and still claim a green victory. When taking a closer look today, market action was actually quite poor, rising VIX, rising TLT, HYG unable to hold and even using a short squeeze in the Most Shorted Names that lasted nearly all day, but really picked up the last 4 hours of the day, only 1 of 5 major averages and that was the R2K, again for a gain of 0.36% while safe haven assets rallied along side! (you'll see below and at the MSI charts).

Since Friday June 6th when I said I expected the move's upside momentum to wane and the move to start to resolve to the downside, this is what has happened in the NASDAQ 100...

Green is the move expected to lose momentum and start to resolve to the downside, yellow is Friday 6/6 when I expected the momentum from the move to die off and a reversal process to start to resolve this move to the downside, over those 2 trading weeks (10-days), the NASDAQ 100 has put in a noisy gain of +0.22%, not even a quarter of a percent, the Dow even worse at 0.05%, while the R2K had fallen behind and needed to play catch up (as we entered a call position last Friday for this week for the Russell 2000, it has had the best performance at +1.06% over the same 2 weeks, and the SPX 0.61%,

Now consider that to get these paltry percentages, this week saw the largest Most Shorted Squeeze of the last 14 months and still, not much in the way of results.

Just about every index now has a string of small bodied dojis or stars, some hanging men and shooting starts. As you can see above, it's candlestick chatter and a lateral trend.

While the final hour looked like the SPY Arbitrage might activate, even that was shot down as TLT and VIX gained on the day against their correlations.

 TLT's afternoon divergence that looked as if it would push the Flight to Safety Trade lower, actually saw that backfire and TLT moved higher in to the close with 3C quickly confirming the move.

 The CBOE VIX rallied against its correlation to move up on the day, putting in what looks like a daily candlestick reversal.

The last 3 days form a bullish candlestick reversal with today's candle being the confirmation, bullish engulfing of yesterday's Star (loss of momentum/indecision candle which is significant following a large bearish candle the day before).

 This shows the SP-500 pinned laterally all day, yet the VIX didn't hover at lateral levels, but gained as it seems from very recent post F_O_M_C activity that VIX is receiving some attention.

 Even VXX, Short Term VIX Futures have gone from in line to leading positive the last several days.

And that VXX negative divegrence which made me think the SPY arbitrage may be activated toward the close, was shut down as VXX moved higher as well in to the close with fast 3C confirmation of the move up, kind of strange to see VIX moving up in to the close for the last 2-days, which is significant because they are both post F_O_M_C. The point being, as benign as the policy statement sounded, it seems traders may have figured out how this ends with inflation forcing the F_E_D's hand to hike rates well before they want to, it's not a decision or choice, it would be a necessity.

HYG tried to lift the SPY arbitrage, but it was in to distribution early as it started...

Ultimately it didn't get anywhere with the Safe Haven treasury trade working and VIX standing up to the monkey hammer, even though Spot was hit at the EOD, it had pushed higher all day.

Ironically, the very mechanism meant to lift the market ended the day in worse position than it started due to protection and flight to safety trades...

APY arb which was on track , especially as HYG started going vertical when I posted, Quick Market Update. The SPY Arbitrage actually ended at the worst levels of the day, again due to VXX strength as it ended the day at 2-day highs and TLT strength as it ended the day at intraday highs.

 The Flight to Safety trade, TLT ending at highs of the day


Short Term VIX Futures ending at highs of the day, actually the last 2-days. 

What's wrong with this picture when the MSI is squeezed, fails to move 4 of the 5 major averages yet Flight to Safety and Flight to protection trades end at the day's highs without any manipulation?


As you see above, the SPY arbitrage failed, ultimately the only thing keeping the market stable in 4 averages and gaining in 1 was a strong short squeeze, but they didn't get much for their effort.

Most Shorted Index vs. the Major Averages...

 As you can see in red, from 12 p.m. on and especially the last hour, the Most Shorted Names were targeted for a squeeze, that failed to lift the Russell 3000 above it's morning intraday highs.

 The same squeeze failed to lift the SP-500 above its morning highs.

The NASDAQ 100 failed to move below it's intraday highs, even with this short squeeze which wasn't as strong as the post F_O_M_C o Wednesday, but the VIX was knocked down Wednesday as well, it was rising in to the afternoon today as you see on the charts above these.

 The Dow 30 couldn't put in a higher intraday high even with the short squeeze.

The only average to move above a.m. highs was the Russell 2000 and still, not getting much of a gain out of such a long squeeze, +0.36%

Of the 9 S&P sectors, only 2 closed near a half a point, Energy of course at 0.49% given the Iraq conflict and Healthcare at +0.48%, the other 3 that closed in the green, Financials at 0%, XLI (Industrial ) at 0.02%and Materials at 0.18%, a weak day with losers coming in at: XLK (technology) -0.68%, Consumer Discretionary at -0.69%, Consumer Staples at a loss of -0.94$ and Utilities pulling back after a very strong week with a loss of -1.43%, that  still leaves Utilities with a 3+% gain over the last 7 trading days.

S&P sectors on the day...

S&P sectors intraday...

Yesterday I posted what I think are two very important posts that give you a feel for what's really going on, which I believe is Institutional players believe the inflationary trend causes the F_E_D or rather forces the F_E_D to hike rates long before their guidance, it's one of the easiest explanations for the way Treasuries/Yields (which have caused commentators to scratch their heads) have been acting.

The first post was Gold is Telling Us Something and the second and maybe more important, 10-Year Yield (Bemchmark) vs. the Market with the 3 most important charts arguing against the illogical "either stocks or bonds are wrong" and introducing the 3rd option which has been 100% with predictions...

 10 year rates vs the SPX at the very top of the 2007 market and...

The same chart right now.

There hasn't been a single divergence like the ones above that didn't result in a market top or the inverse divergence resulting in a market bottom.

The not so-stealthy culprit...

Inflation...

As for Precious metals which we have been following for some time as they carved out a base and gold miners, Precious Metals had their best week in 4 months with Gold above $1300 and silver above $20 with gold now higher than the SPX year to date in just this short period. Remember, gold and silver are bought as inflation hedges, typically in anticipation of inflation, the one thing that forces the F_E_D to hike rates.

It was very difficult to take away any next week forecasts as there was so little intraday movement in 3C or the averages, it was largely in line as TICK was trading in a +/- 250 band!

 If you didn't get a chance to read last night's 10-year benchmark vs the market, I'd check it out. With no F_O_M_C follow through (indicative of a knee jerk move), carry trades selling off, Yields dropping to market crash levels, Flight to safety trades rallying (including Utilities) and now VIX not being hammered two days in a row in to the close as is the custom, something has changed since the F_O_M_C.

I'll be looking very closely next week at Treasuries and VIX/volatility in specific, I suspect we are going to see even more changes as today's market action, even with the R2K rallying at the EOD, isn't normal with TLT and VXX closing at their highs.

I thought I'd share this with you simply because the phrase"It's NEVER different this time" is a lesson investors haven't learned in nearly 400 years going back to the Dutch Tulip Craze.

 From ZH...

While the price analogs of the last few year's exuberance in US equity markets are enough to worry all but the most systemically bullish "believer"; we suspect the following article from the LA Times In the Spring of 1987 will raise a few hairs on the back of the neck of perpetually optimistic extrapolator...

It's never different this time..

"One of the largest bullish factors is burgeoning worldwide liquidity, thanks to expansive monetary policies by central banks. That has helped fuel a surge of foreign investing that could propel US stocks higher, regardless of what happens to the American economy, some analysts say...

Low interest rates also help stocks by making Treasury securities, certificates of deposit and other interest-paying investments less attractive. The sluggish economy, meanwhile, keeps the Federal Reserve from driving up interest rates and prevents inflation from overheating...

Also, the sluggish economy--by keeping manufacturing rates low--discourages money from flowing out of financial assets into such investments as factories and machinery."

     - LA Times, March 8, 1987; a few months before the October 1987 crash

Read that again!!

Never different.

Quick Market Update

Trying to extract intraday data from this market is like trying to pull teeth with your fingers, it's unreal how flat it is, but I believe they are trying to activate the SPY arbitrage in to the close, whether they can or not is a different matter and has little to do with anything beyond the next 45 minutes.

 The SPY arb has been negative today because of VIX relative strength and TLT relative strength, HYG has been in line, but you can see it is slightly improving, I'll show you why, but keep in mind, these are very weak, I'll show you that too.

 The MSI has improved a bit on the day, although when you see the TICK data, it's pretty difficult to comprehend.

There's a small intraday negative on the VXX 3 min chart, but this is very small, it's not something I'd even attempt to day trade.

 And TLT also has a small negative divegrence, they need these two to go down and HYG up to activate the lever of SPY Arbitrage.


HYG is moving up as it would need to, but in to a negative divegrence, the very vertical look of the move looks to be purposeful/manipulative.

Meanwhile the TICK range has dropped to something I don't think I've ever seen, +/1 250, that's about as flat as intraday breadth can be, so where any stocks are moving is almost impossible to say as this is for all intents and purposes, DEAD IN THE WATER.

I'll post some more significant longer term indications that may be more indicative of next week.

GDX / NUGT Position Management

I've decided what I'm going to do for now with the NUGT long position, it's taking a more forest rather than the trees perspective. There were some negative divergences in both GDX and NUGT that were along the lines of a pullback, nothing too sharp, but if there's a high probability, I'd rather exit, book the gains, maybe enter DUST until it's time (pullback ends) to re-enter NUGT long, but this is a much broader base, a much stronger trend (3C charts) and since just before the CPI data came out, many of those shorter term negatives suggesting a pullback were able to move quickly to in line status.

I've looked at the longer term base and whether a larger inverse H&S bottom or a Cup and handle bottom, GDX/NUGT are acting as they should at this point in those patterns.

For example...

While I was afraid a candlestick like today's might show up, a Harami reversal, it's a 1-day reversal candlestick, it's not on increased volume and to be accurate, a Harami or other "reversal" candlesticks don't necessarily mean down, they mean the current trend has lost some momentum, but there are 3 trends, up, down and lateral which is consolidation. With GDX sitting just under Stage 2 breakout resistance (diagonal red trendline), it wouldn't be surprising to see a little consolidation before a breakout move to a serious stage 2 trend occurs, that's the trending stage and out of the choppy base.

We also have X-Over long signals, we have the trend now fitting inside daily Trend Channels, we have strong 3C charts and a few weak ones in short timeframes.

Using a weekly Heiken Ashi candlestick chart, we can look at this as a large inverse H&S base with the Left Shoulder, Head and Right Shoulder just under the neckline or as a Cup & Handle Base in which case the handle would be about to breakout as well at the right place. The price chart shows the last 2 weeks as a reversal for the first of the 2 green candles to the upside and second shows strong momentum.

Also volume is doing exactly what it should for either pattern, increasing. These volume trends are going to become more and more important so I'll be putting out a piece on volume analysis.

 On a daily Heiken Ashi chart we have an accelerating trend as the candle bodies get bigger, unlike regular candlesticks, the longer upper wick is bullish with these and look at that volume, exactly what it should be by the textbook.

Looking at the 4 hour 3C chart for the same time period, we'd expect to see increasing accumulation until it's at its heaviest point just before a breakout, that's exactly what we see in either base pattern.

I think to let this go without strong evidence would be very short sited poor judgement.

I'll be holding NUGT long.

Market Update

I'd normally be posting quite a bit more, but this Quad-witching is unusually tame in volume, volatility and really almost anything of interest including underlying 3C signals, it's difficult to find anything that stands out.

I did however find some unusual charts in some out of the ordinary places, like Leading Indicators and there are some unusual things going on during this very flat trading day when volatility and volume are usually very high.

Carry Trades are virtually flat, but it does seem like there may be some covering in the carry trades, interestingly the AUD/JPY which has been the only carry trade that has had "some" market correlation this week ( a day or so I believe), looks as if it's being covered or rather closed, the same looks to be true of the EUR/JPY and the JPY in general (which would be buying in the Yen).

 Yen intraday positive divergences, to close a carry trade, the Yen has to be bought back so accumulation or higher prices in the Yen (as it is the second symbol in a FX pair / carry trade ie: USD/JPY is the short with the first being the long).

 The larger 5 min Yen chart shows the same trend developing, looking like the flat carry trades (today) and very flat for AUD/JPY the last 2 days after the F_O_M_C which is one of the only places it seemed to be in charge (as well as leading positive just before-possible leak) smells like there was a quick carry risk on that is now risk off and this in to the F_O_M_C.

 To cover the AUD/JPY, not only would the $AUD have to be sold, the Yen would have to be bought to close the trade, the USD/JPY is the tough one as there's outside intervention from the Bank of Japan as they try to maintain the $102 level and have clearly been active in lifting bids as price has dropped below that level (which "could" be an indication that carry trade is being closed, thus the need for the BOJ to lift it back to $102).

Here a 15 min chart of $AUD has a positive divegrence right in to the F_O_M_C this week and after a leading negative divergence right now.

These are also apparent on some longer charts as well.

Here's the Euro (EUR/JPY carry) which has a positive look to it pre-F_O_M_C, although not a clear signal, what is clear is the leading negative after the F_O_M_C, especially in to yesterday's non-follow through market day when EUR distribution looks to have started carrying over to today.

That's just some of the smaller pieces of the puzzle.

As for others...

Yesterday's very strong SPY Arbitrage (yet very unhelpful) has turned negative, there are clear reasons why, such as...

 Here I have the CBOE's VIX vs the SPX (green), I have inverted the SPX's prices so the lower they look on the chart, the higher they actually are, this is to show the relative performance as VIX would normally travel in sync with inverted SPX prices (as the two have a normal inverse correlation), it's clear to see the VIX is outperforming the SPX/correlation today. If you drew trendlines from VXX point A to point B you'd have a VIX uptrend, if you drew the same for the SPX, you'd have a downtrend which actually means the SPX is a little higher here, however, the VIX should be at new lower lows on this chart, not outperforming.

 This is the same SPX price inverted chart with the VIX showing the normal correlation to the left and as the SPX's prices go from up to essentially flat today, the VIX is shooting upward in stronger outperformance of the correlation.

As far as the SPY Arbitrage goes, that is not positive for a positive SPY arbitrage, the other two assets would be HYG which is nearly perfectly in line with SPX so there's no relative outperformance vs the VIX alone making the SPY arbitrage weak between those two assets, but there's a thrid in the model, VXX, Short Term VIX Futures which would also need to be underperforming for the SPY Arbitrage to positively effect the market even though it was extremely positive yesterday and had virtually no effect.

TLT above in blue (20+ year Treasuries) vs the normal SPX price (not inverted) shows treasuries outperforming as they should be down, I addressed this at length in last night's post,  10-Year Yield (Bemchmark) vs. the Market which clearly showed Yields of Treasuries clearly calling the 2007 top, the 2009 bottom and is now showing the same behavior seen at the 2007 top even though it should be higher because of the F_E_D taper.

As I reminded last night, Yields move opposite treasury prices and the market tends to be drawn toward yields so TLT up today suggests a flight to safety move which is what called the 2007 top and the inverse of that, a risk on move that called the 2009 bottom and again we have the same scenario now as at the 2007 top as shown in detail in last night's post. The point simply being that for today, there's a risk off or flight to safety in Treasuries despite very flat, dull market action WHICH IS MOST CERTAINLY DUE TO QUAD EXPIRATION, YOU'VE SEEN NORMAL WEEKLY AND MONTHLY STOCK OPTION EXPIRATION AND THE MARKET PIN IT PRODUCES AT MAX PAIN, NOW ADD 3 MORE OPTION CONTRACT TYPES.

I'm curious to see if the 2 p.m. area has the typical effect we see on normal options expiration today as the last 2 hours after the pin is lifted, we tend to get some of the best information of the week.

 Here's TLT with the SPX inverted so you can see where TLT "should be" if there were no flight to safety or TLT move higher under normal correlations.

Yields (as explained last night which move opposite treasury prices) are down for the 10-year, and as we've seen with leading indicators, yields tend to pull equity prices toward them like a magnet until they revert to their normal correlation.

This is 5 year yields which I normally use for shorter term market direction, they are negative and this is a negative for the market as again, the market tends to be pulled toward yields, thus the lower yields at the 2007 top took prices of the averages lower, just as they are now on a macro basis and higher yields at the 2009 bottom pulled equity price higher.

Also...

 Professional trader sentiment is down on the day, not following the SPX.

This is also interesting, the SPX (green) vs the 9 S&P sectors, as of this capture only Energy and Healthcare were up, among the laggards Financials, Tech, Consumer Staples, Consumer Discretionary, Utilities (which isn't surprising after they tripled the SPX's performance this week as a Flight to Safety group), and Materials.

There's a legend at the top showing the colors and the S&P sectors for each if you click on and zoom in to the chart.

This is a form of Rate of Change between the SPX and Financials for the day (as of the capture, this post has taken some time).

As far as market breadth, the NYSE TICK Index is VERY tame at approx +/-500 which is about as tight as it gets, essentially almost zero movement among stocks, no trends.

 My custom TICK vs SPX indicator shows roughly the same, breadth following along almost exactly with the SPX which is unusual, especially on what is normally such a high volatility day.

 The Russell 3000 Most Shorted Index (red) vs. the Russell 3000 (green) showing no short squeeze activity, in fact they are range bound on the day and underperforming since the F_O_M_C announcement's initial knee jerk Wednesday which has seen ZERO follow through.

And a closer look.

This dullness (although there are some interesting trends most people probably wouldn't notice) extends not only to the averages, but a number of assets as can be seen by the TICK index.

Hopefully after 2 p.m. like normal options expiration, we'll start to get some more interesting, useful data.

As of now what we know is VIX is starting to come alive from the depths of lows not seen since Feb. 2007 on Wednesday's F_O_M_C and from all appearances, the move off the F_O_M_C was a knee jerk reaction, but not one grounded in any real buying, but rather fluff short covering, now who the sellers were is a different matter, the 3C trend since the break above the 3 month range and the psychological SPX 1900 has been extremely negative so it would not be surprising if strong hands were providing supply for shorts to buy to cover on the knee jerk. It also seems fairly clear that this was a knee jerk reaction which are typically wrong as I post before EVERY F_O_M_C event as there has been zero follow through.

As for the larger macro story beyond the long term 3C charts (and others), I think the CPI inflationary data taken with gold's outperformance (silver too) and gold miners taken with the Yields data posted last night has some very real , very negative implications for the market.

The F_O_M_C policy announcement has been called "Boiler-plate", essentially just the norm, nothing interesting, however the inflationary trends and the performance of gold/silver seem to suggest the pros believe the F_E_D will be FORCED to hike rates sooner than later, and perhaps the F_E_D does as well as both 2015 and 2016 forecasts for the F_E_D funds rate both increased again although that is little discussed.

NUGT Updated Stops

I'm still very torn on whether to trade around NUGT as it has been a pretty spectacular winner (but after yesterday's performance, profit taking is inevitable) and all of the longer term trend indications are very strong for a primary uptrend (Bull market in miners/Gold). This is where holding on to the past can skew your decision making process, specifically I'm talking about calling a top in AAPL or AAPL topping as it made new highs, of course AAPL longs back then wouldn't hear of anything like that, you were clearly a whacko if you didn't believe AAPL was going to $1000 or $2000. I had great short positioning and saw a smaller positive divergence for a bounce which is pretty common in a choppy top (that's why tops and bottoms are the hardest to trade, it's stage 2 mark-up and stage 4 decline where the easy money is made as long as you know when to avoid the counter trend moves, especially in stage 4 which can destroy great gains-look at the first CT rally after the initial 1929 crash, 5 months and +50%).

In any case, I covered the short looking to re-open at higher prices, then Third Point's 13F came out and AAPL was no longer on Dan Loeb's top 5 holdings, that crushed AAPL immediately as all hedge funds tried to fit out the small exit at the same time resulting in a -45% move over 8 months, nearly half of AAPL's value and that positioning was lost due to overtrading or trying to trade around corrections too much, that is the kind of event that stays with you subconsciously often, this is why I support the use of trading journals, to uncover what drives us unconsciously to make bad decisions based on past experiences that may have nothing to do with the current environment other than to remind you in some way.

I'll put out an update on the PM's and GDX/NUGT in a little bit as more data accrues, but for now, these are the Trend Channel stops that I prefer to use on a closing basis. The Trend Channel was the first custom indicator I won an award for.

 The 60 min Trend Channel has held this entire move thus far (on a closing basis with only 1 stop out on a 60 min basis, the channel widening yesterday got me a little concerned, although in the bigger picture, wringing out the excesses with a pullback is typically healthy for the asset, plus we get to see if it is accumulated on the pullback which I can virtually guarantee for GDX/NUGT. This also allows those who may want a position in the asset, but who correctly have not chased it, to find an opportunity to get in at better prices and much reduced risk.

The 60 min stop, which I prefer to use on a closing basis is $41.50

 The good news for NUGT is that the Trend Channel has made a new turn to the upside and now can be used on a daily basis, the stronger the trend, the wider we can make the channel (for instance, after stage 2 breakout to mark-up, we will likely be able to use a 2-day Trend Channel, holding the bulk of mark-up gains.

The stop here which is always on a closing basis is $35.05 as of now, but will continue to lock in gains for the next several hours.

Also good news as we have been tracking a GDX/NUGT long position for a while... My X-Over Custom M.A. Screen just gave a confirmed long signal, we were only a day away from it yesterday.

The 10 and 22-day price moving averages have given a long, the problem with using these alone is they often whipsaw and give a lot of false signals, so I added a custom indicator in the middle window (yellow) and a 22-day / bar moving average, which just crossed to a long today and the third indication is Wilder's RSI 14 period above 50, which gives us all 3 signals long, a confirmed long.

Typically after a new signal (long or short) is given, the first pullback is to the yellow 10-day moving average, subsequent pullbacks tend to be deeper to the blue 22-day moving average, so by the time the 10-day moves up, if in fact this is the pullback, it should be around the gap area which the market has been relentless about filling, however this too may change as it was not this way before QE (2009), that gap would be a break-away gap and likely unfilled for quite a long time.

I'll update these soon and let you know what I decide to do, maybe a hedge of some sort.