A Bigger Picture Look at Financials

As many of you know, i is my belief that "one" of the reasons the F_E_D engaged in QE and kept coming back to it (because theoretically, the first round should have achieved what the F_E_D set out to do) has more to do with a political bank bailout than anything.

When Bullard said (Tuesday if I recall- the days seem to melt together with Bullard) QE worked reasonably well and they could go back to QE, blah, blah, blah, before coming out the very next day (yesterday) with his personal view that rate hikes and policy normalization should get under way now, that the F_E_D funds rate is 400 bps below where it ought to be, which just so happens to match up exactly with a little known Bloomberg radio interview he gave over 9 months ago in which he said the exact same thing, "Policy normalization/rate hikes should start Q1 of 2015 and by the time he takes up his role as a voting member of the F_O_M_C in 2016 he expects the F_E_D funds rate to be somewhere between 4 and 4.25%.

This was notable because Bullard has said a LOT over the last 9 months, he's said a lot that has been market moving once we already had cycles set and every comment moved the market in the direction the cycle was set (whether from distribution at September highs or accumulation at October lows) or in other words, the direction Wall Street had already positioned themselves for.

The fact that the timing of the rate hikes and the target rate at 2016 were exactly the same a day ago as his interview on Bloomberg radio April 1st (or second) of 2014, 9 months ago, suggests that this was not based on data dependency, otherwise there would likely be some difference in conditions over the last 9 months that would have at least a minor effect on policy normalization targets that exact.

However, I digress... What I was getting at was the 1008 bailouts and the golden parachutes, the bonuses for firms that were being bailed out by the government, were politically, highly unpopular. How do you bailout a bank without bailing out a bank in the voting public's view? Subterfuge! You use a mechanism that few can understand that has another reason for being used, but the net results were the same, there were earnings reports from the banks that saw quarter after quarter report entire quarters without 1 single day of trading losses, in other words, a stealth bailout.

On October 31st QE was ended, this was the first month of Q4, then suddenly Jefferies reports as a harbinger of Financials earnings and it wasn't good, JPM reports, again not good, Wells Fargo reports, not good and Bank of America is the last I remember specifically that reported Q4 earnings that saw their sales and trading down -50% from the previous quarter (Q3 when QE was still in effect to some degree). In just about all of these, FICC income dropped dramatically (fixed income instruments, currencies, and commodities). This alone is darn near all the proof you need to show one of the functions of QE was a stealth bailout for financial institutions. While the F_E_D / government couldn't directly hand money to the banks in a bailout (as it was deeply unpopular with the voting public ), they could and did through QE and it worked.

Thus for this reason, the fact that banks really have no business model left once trading revenues are taken away with QE (loans/mortgage/Cap-ex, etc. are all dead), Financials short has been one of my favorite longer term themes.

To make things even worse, recently there has been a rash of counter-party risk, liquidity hoarding which is exactly what froze up and nearly collapsed the financial and credit markets of 2008 as no one knew who had what exposure to sub-prime as every quarter banks said they had no more exposure only to report the following quarter they still had massive exposure which caused interbank lending to completely freeze over counter-party risk concerns. No one wanted to lend to the next Lehman and that is reemerging.

I'll leave the research of financial earnings for you if you want to check it out in greater depth, just be sure to check out Fixed income and trading revenues on a Q over Q basis and YoY basis as well.

What I want to show you is the Financial sector itself with multiple timeframe analysis and multiple asset confirmation.

 This is a daily chart of XLF with a 50-day moving average (yellow), but looking at the red trendline and the yellow arrow, does this price pattern look familiar?

Especially if you take the 50-day moving average as an upside target?

It should, this is the concept of the "3 areas of a H&S top I'll short and the one I WILL NOT" (I need to put this up as a permanent link, but it will be in the Resources and Concepts area of the new site which is actually just about 2 weeks from being launched finally, I'll get in to that later as I do need some input).

For those who haven't heard of this concept or need a refresher, the first two areas of a H&S top I'll short if there are signals to do so are the head, the top of the right shoulder, NEVER the break below the neckline which is what happened at the yellow arrow and after new shorts show entered on the break of the neckline (yellow area) are shaken out on a move ABOVE the neckline, that's the third and last place I'll short a H&S top BECAUSE THIS KIND OF SHAKEOUT WORKS AGAINST EVERYTHING TECHNICAL TRADERS ARE TAUGHT AND IT HAS WORKED TIME AFTER TIME.

One of our best examples is HLF which we entered on a +25% day up, the largest day up in HLF's history, also a shakeout exactly as seen above and the HLF short which has been hands off/auto-pilot since is at a gain of over +52% with no leverage.

I suspect based on the exact same concept playing out in XLF/Financials right now, that the head fake move below the neckline (yellow arrow) which would draw in new shorts and hit stops, is on a short squeeze shakeout and will probably move to the 50-day moving average (yellow) or thereabouts, at which time XLF short or SKF/FAZ long looks like a fantastic entry short financials.

On a VERY long term basis, the 6 hour chart shows there have been several very large negative divergences with moves of -8+%, but they pale in comparison to the divergence since QE ended and with it, the banks' free meal-ticket to virtually risk free and absurd profits. Just look at this quarter's financials earnings, it's all right there.

 The 2 hour chart shows the last major accumulation area, the October lows which we forecast a week or more ahead of time would lead to a "Face Ripping Rally", but one that wouldn't hold. The September highs are seen to the far left leading to the October lows, in addition to the negative divergence there, that was also a "Bullard" comment day, "We should be willing to remove accommodative policy".

The negative divergence since then dwarfs the October lows positive. With the very big picture already very negative, this is almost more of a tactical timeframe, although a very long term version.

XLF's hourly chart shows the same distribution signals as the free meal ends on Oct. 31st. If bank earnings and trading revenues weren't so bad, I might have to rethink the entire "stealth bailout for banks", but as it stands, they bolster the case, especially when Bank of America sees a 50% drop from the previous quarter/report!

 FAZ, which is one of my long positions [personally is a 3X inverse or Financial Short ETF. Thus this 30 min divergence after near perfect confirmation is a very clear/clean signal suggesting FAZ is one of the longer term positions I want to hold.

UYG is the 2x LONG Financial ETFs, these will have price moves that are in line with their leverage, but volume / demand is totally different which means if 3C is confirming, it's not because they are a linked asset, it's because there's something there.

The 15 min 2x long Financials is leading negative, right along the lines of the major market averages right now.

XLF 10 min shows a positive divergence right now after numerous divergences that were right on with their calls.

This is a bit longer than most of the averages (10 min), but at the same exact area.

 The 5 min 2x long Financials (UYG) confirms and is in line with the major market averages with both recent divergences, the first week of January that failed on the 8th and the most recent one, before that the negatives are in line with the major averages as well, which is what led to a short term oversold condition the first week of January.

Speaking of which... We forecast that the Santa Rally would be used against traders just because they expect it as if it were a birth right, that happened and as a result our forecast was the January effect (new money flowing in to the market) would also fail , so much for the first month of the year or the January effect, had it been positive you'd be hearing everywhere the old adage, "As January goes, so goes the year". There's not a lot of talk about that is there?

 XLF 3 min is in line with many of the market averages, positive with similar negative signals prior to...

 FAZ (3x short/bear Financials) has a 2 min negative that has been in line, but just as we expect to see distribution in to higher prices for the averages, we expect to see accumulation in to lower prices for the inverse ETFs.


FAZ 1 min on a move lower today, leading positive.
Just for confirmation...

FAS (3x long/Bull Financial ETF) with a negative signal in to higher prices as expected.

I don't know if you agree, maybe you want to check out the earnings reports, but I think FAZ (long) is one of my favorite longer term positions.