The bottom line is that yesterday we had a severely oversold market and I'm not talking about price (you'll probably recall this week a lot of factoids about worst performance since "XYZ" as well), I'm talking about breadth which is where the truest measure, in my experience, of an oversold or overbought market can be found.
From last night's Daily Wrap...
"Just to add to that, we need a short term oversold condition, the S&P sectors provide that with 9 of 9 closing red, Utilities were the best performer at a loss of -.14% and Industrials were the worst at -2.43%.
To make matters worse, of the 238 Morningstar groups we track, only 4 closed green today!
Tonight's Dominant Price/Volume Relationship is what I'd expect for a short term oversold condition, the Dominant theme was Price Down/Volume Up, 25 of the Dow 30, 74 of the NASDAQ 100 , 1025 of the Russell 2000 and 334 of the S&P 500.
This relationship suggests a 1-day oversold condition and most of the time the market closes green the next day, there's no doubt about it, we are oversold short term which is the perfect place to widen out the base as expected last Friday in the Week Ahead post and we are right at the area we expected to be at.
Tomorrow we should start to see whether or not we can trust a move to the upside for a long trade. One thing is for sure, volatility is picking up and that's typical in a topping market."
So yesterday it was about as clear as it has been recently with numerous extreme oversold conditions, that we were very oversold and would likely close up regardless of the F_E_D and were on our way to doing just that even before the minutes were released. Interestingly, the Investor Sentiment Fear and Greed Index was at an extreme bearish reading of 4 out of 100 wit the most bearish being 0, as usual, retail chases market performance, I'm sure tomorrow the number will be 96.
As to the last paragraph, is this a move we can trust? With no real base work done and a parabolic move, this is the difference that I was talking about most of the day, there's a probability that the market moves higher, but there's a difference beteween a probability and a high probability, low risk trade. I personally would not feel very good tonight going to bed and wondering what tomorrow morning or afternoon might bring.
As for the F_E_D minutes from the last F_O_M_C meeting 3 weeks ago, the take away was dovish, they F_E_D is concerned with a strong $USD and it's impact on global growth which is ironic as earlier today the IMF cut Global Growth Forecasts, Germany, after a spate of bad economic news saw Industrial Production fall, all but sealing a triple dip recession in Europe with 10-year Bunds hitting a new record low yield in a flight to safety, while China's September Services and Composite PMI both declined and that was before 6 a.m. Later the Russian Central Bank intervened to try to halt a plummeting Ruble as Inflation soars higher, throw in Turkey sending out tanks to stop protests as their stock market tumbled, and the first US Ebola patient dies and the new topic (which I have been discussing at length with friends and family) , is the Ebola strain airborne and I think it is, which has now become a major economic issue... think airlines not to mention Barclay's latest research report calling Ebola a market "Tail Risk" that can no longer be ignored. On and on, but the other thing from the last paragraph excerpt from last night's Daily Wrap was, "One thing is for sure, volatility is picking up and that's typical in a topping market."
And for some proof...
Well look at the declining ATR in yellow and as it got worse in to rising prices, orange and then red and then compare to where the ATR or Volatility increases, on the July sell off and at stage 3 and 4 of the August cycle with falling volatility in stage 2 mark up of the August cycle. You have to put the volatility in perspective when the market 's volatility increases and headlines about the best day in 3 years abound, there's a reason and it's the same reason that bear market rallies are some of the strongest rallies you'll see, as they finish and go on to make a lower low.
Of course the much warned about, F_E_D "Knee Jerk" reaction was a big part of today's move, however this was on the F_E_D being more dovish and concerned about the weakness in global markets, ironically the market knee-jerked higher when the market has been selling off recently in large part due to global growth concerns. Of course this is the nature of a knee jerk move, shoot first, ask questions later and the question that will be asked will be about the fears on global growth with the F_E_D now confirming it is a concern.
Meanwhile the market takes all of this as meaning the F_E_D won't raise rates for a considerably longer period, but if you read the minutes as the WSJ and F_E_D whisperer, Jon Hilsenrath has, you get the following...
“Many officials expect the first rate increase by mid-2015. An improving U.S. job market led some officials to press for earlier increases......Several participants thought that the current forward guidance regarding the federal funds rate suggested a longer period before liftoff, and perhaps also a more gradual increase in the federal funds rate thereafter, than they believed was likely to be appropriate given economic and financial conditions,” the minutes said. “In addition, the concern was raised that the reference to ‘considerable time’ in the current forward guidance could be misunderstood as a commitment rather than as data dependent.”
Suddenly, the basis for the knee jerk move higher is not quite there, however the Global Growth concerns are. The F_E_D hasn't been able to pull the US out of its funk with 5 years of ZIRP, what exactly are they going to do for Europe, Japan and China? It doesn't take long for the market to internalize all of this, but the knee jerk reaction doesn't have time to do anything else than make assumptions about the bullet points from the talking heads, thus the parabolic move on an unsteady base which I'd rather sit out, but we still have time to do it right.
The late day breadth and momentum indicators were giving out, for example...
The Ultimate Oscillator on the SPX, set to 5 mins as anything longer can't gather data or a trend with only two hours left in the day, not only showed a positive divergence at the a.m. lows, which I take nothing away from as I believed a move up was a probability since last night, however it fades to a negative divegrence in to the parabolic move's end of day trade and it's the same for every major average.
As for leading indicators, HYG was in line with the SPX nearly tick for tick intraday.
Early in the day off the intraday lows, pro-sentiment indicators were positive and faded to negative in to the afternoon.
Somewhat interesting, the 20+ year and 30 year treasuries rallied with the SPX in to the post minutes action...
Part of that bull steepening was due to the 5 year Treasury rallying, sending rates lower post minutes, which as a leading indicator looks like this vs the SPX...
Another Leading Indicator not biting the Knee jerk bait was High Yield Credit,
As for 3C, initial moves were confirmed by 1 and some 2 min charts, but as TICK hiccuped, the negative divergences started (keep in mind the first hour was confirmed so we only had about an hour of divergence for the most part)...
As for market breadth, this will be easy without even looking...
The Dominant Price/Volume Relationship was Close Up/Volume Down which is the most bearish of the 4 relationships, it usually produces a close lower the next day as the market is running out of buying demand. The Dow had 18 stocks in the category, the NDX with 60, the Russell 2000 1003 and the SPX with 293.
In a complete flip flop of yesterday's sector performance, all 9 of 9 sectors closed green, usually a 1-day overbought event with the leader being Healthcare at +2.62% and the laggard being Energy at +1.03%.
Of the 238 Morningstar groups, another near mirror reversal of yesterday with 226 of 238 posting green, again a 1-day overbought breadth condition.
There were no surprises good or bad in breadth indicators, they were exactly as I'd expect them to be, well in fact maybe they were a bit on the low side considering the percentage gains and overbought conditions, 3 year best performance, etc, but no smoking guns.
My plan, other than managing some positions here and there, hasn't changed at all. I'm still looking for a reliable base which doesn't need that much work to be in place and that I'll trade, today's knee jerk is the last thing I want to trade based on a deeply oversold breadth condition yesterday.
Finally I close the Wrap out with the 1 min Index future divergences as the 5 min divergences are no longer positive but in line at best and in the case of ES, lagging, slightly negative.
The 1 min, which I usually don't pay much attention to overnight may be telling us something early on...
