Thursday, February 12, 2015

Daily Wrap

The 8:30 a.m. mini-data dump (Retail Sales/Initial Claims)  was another set of misses that will simply move the US Macro-Data Divergence with the market...
 LOWER...

As for Retail Sales at 8:30 were the worst back to back decline since October of 2009...

This is the first sentence of Bloomberg's reporting on today's retail sales in which cheap gas prices were supposed to be good for Consumer Spending OR SO THE NARRATIVE WENT...

"Lower gasoline prices continue to tug down on retail sales." Yes, cheaper gas is causing a decline in consumer spending. It sounds counter-intiuitive, but if you look at the Initial Claims also from 8:30 this morning, also a miss, it's the Shale oil states with the largest lay-offs, as reported yesterday Haliburton is laying off 5000 to 6500 employees and this is not a one-off event, there have been a number of them, the last I remember from about a week ago was Baker-Hughes. Oil prices are cheaper than most Shale Oil drillers can produce a barrel, thus the drop in rig counts nearly every week and the massive layoffs across the industry, yet if you looked at the market alone, you'd think all was fine and dandy today as the market whistles past the graveyard.

There was what some would view as a strange bout in FX volatility and Treasuries, although most are explainable and some we have been expecting such as Treasuries. Perhaps the biggest event of the day that went with little fanfare was the BOJ's (Bank of Japan- originator or QE-Zilla) realization that FURTHER STIMULUS MAY BE COUNTER-PRODUCTIE...VERY HAWKISH,  even as the Swiss Central Bank (Riksbank) entered the currency devaluation game by cutting with a "SURPRISE"-10 basis points to put their policy at NIRP (negative interest rate policy) at -0.10% and committed to buying $10 bn (QE) in SEK terms of Swiss government bonds.

At a time when all of the new entries in to QE are coming in fast and furious, those who have tried it for a while like the US and Japan have either backed out or are looking to back out. I posted Treasuries and currencies today as there were some wild moves, most are understandable and explainable, but with carry trades often at 100:1 leverage, the most popular Carry Cross (the JPY crosses) could find themselves at monstrous losses in short order, that's the danger of the carry trade and the carry trade's danger to the market, all is good until it's not.

As a result, the Yen launched higher, the EUR/USD higher as well apparently initially on the Ukraine cease-fire which is a doubtful outcome and later I suspect on the softening or apparent softening of the German position as it relates to Greece, however this at the same time as the ECB had to quickly increase the Greek banks' access to the ELA (Emergency Lending) as rumors that Greece had run out of emergency funds were met with a hastily thrown together ECB press conference early this morning increasing Greece's access to emergency funds from $59.5 bn (which they apparently already burnt through) to $65 bn as funds continue to flow out of Greek banks. Thus in that light, a somewhat conciliatory tone from Germany to halt the outflows from Greek banks while they either do or don't sort this out would seem reasonable, not necessarily truthful. As the EU's J.C. Junker said, "When it becomes serious, you have to lie".

*UPDATE-Since writing the above, as the EU leaders exited the summit, a less conscillatory tone was struck


  • DIJSSELBLOEM SAYS GREECE PROCESS GOING TO BE V. DIFFICULT, "DON'T GET YOUR HOPES UP YET" ON GREECE

    • *DIJSSELBLOEM SAYS `DON'T GET YOUR HOPES UP YET' ON GREECE
    • *DIJSSELBLOEM SAYS `VERY CAUTIOUS' ON GREECE
    • *DIJSSELBLOEM SAYS GREECE PROCESS GOING TO TAKE TIME
    • *DIJSSELBLOEM SAYS GREECE PROCESS GOING TO BE V. DIFFICULT
  • *MERKEL URGES GREECE TO MAKE UP ITS MIND SOON ON FINANCING

Poland's Tusk, Finland's Stubb, and Juncker also chimed in with the latter commenting on Greece's "anti-social" behavior.

Greece's Tspiras added his own punch, The MoU as we knew it is over. The same goes for the troika. All these years, the burden fell on the poorest. Our aim is to restore the sense of justice."

*END UPDATE...

It only makes perfect sense as Macro Fundamentals and Earnings decline, the market should find confidence, despite the "Haunted House " Global economy with something frightening around every corner (paraphrasing Third Point's Dan Loeb).

However it does make sense when you have a range that has lasted almost the entirety of 2015 and very clear resistance of that range, that our macro concept of a highly probable head fake move takes place. I suspect more than anything else, more than the wild market ride of up down and up overnight on Greek Rumors and denials, today's move was likely not anymore complicated than the 80+% probability of a head fake move at such an obvious range in such a popular asset, this is what was warned of almost a week ago last Friday and 4 times since, simple as that. I don't think it was macro data, I don't think it was the BOJ pulling back from any more accommodative policy, I think it was the simple concept that we see on a near daily basis in some timeframe and asset.

As for the right lever to pull, being there was no Macro-Data cooperation, no  Treasury cooperation, no Carry trade cooperation, no HYG cooperation (closed red), the only thing left...

From last night's Daily Wrap,

"Also you may have seen, but as of this week's CFTC futures data, the Net Spec VIX position is at record highs."

And BINGO!

VIX (spot) closed at $15.34, which is the lowest close since the end of December 2014 (26th). The record high net long exposure in VIX would certainly be an ideal ramping lever.

When we look for signs of a head fake move, take for example USO this week in which we expected a head fake move below a bullish ascending triangle, shaking out longs, we look for certain things...
 USO's bullish ascending triangle is an obvious head fake move as traders expect an upside breakout, so a downside break below their stops provides cheap supply in size for smart money, all that needs to happen is a head fake / shakeout which we anticipated with the break below the triangle and accumulation of that break which looked like this on a 3C chart.


With head fake moves, we look for signs of accumulation of the shares that were given up by traders stopped out, kind of like this...

However when we are looking for proof of a head fake move in the averages, it's usually more serious and more elements involved such as the levers, leading indicators, currencies and 3C charts.

The break and negative divegrence at the triangle's apex where technical traders expect the bullish price pattern to break to the upside and are subsequently stopped out and the accumulation of their shares on the cheap and in size.

With an Index, it's a little more complicated, we look for the same signs, but additional ones such as leading indicators, FX carry divergences, etc.

Before I leave the Energy sector and USO, I had posted USO Update & Effects in which the general idea was climbing oil priced would effect the Energy sector (XLE) which would effect the broad market.
While there seems to be a correlation between USO (blue) and SPX (green) like today, the correlation is more about the Energy Sector and here's where it gets interesting... It's not surprising that oversold Energy stocks would bounce with the oil , but on a forward looking EPS basis, Energy stocks are poised for some massive declines as we all know they are not doing well with massive lay-offs and many companies being driven to the brink of insolvency over low energy prices, which brings us to the dislocation...


The true correlation is with the energy sector, USO is simply a spark. This is XLE vs SPX today.

The difference is USO has a decent positive divegrence, XLE...
 XLE recently at the SPX head fake area.

XLE's trend since the 1/29 to 2/2 bounce.

This is the Energy Sector's Forward P/E, now at highs not seen since the dot..com bubble, obviously there's some adjusting to do there to the downside.



Going back to what was called out last week as a probability as it is such a strong concept and I wasn't going to be disingenuous, a head fake move above such a clear range in the SPY is not surprising and that's why it has been mentioned at least 4 times going back to last Friday.
SPY head fake below the range at new intraday lows for 2015 leading to a momentum move in the range and above the range to today's highly probable head fake move and that's not just based on the highest probabilities or even charts like these...

 SPY above the range...

 QQQ in the same cycle

IWM breaking above the resistance.

These are all very high probability signals of a head fake move, exactly what we look for, no different than USO, except that was on a downside head fake move.

However in addition, the more telling parts that have been very sticky an unwilling to give any ground until now are the leading indicators...
 SPX:RUT Ratio has not confirmed for 3 days, exactly the amount of time the SPY has been above the resistance area of the range.

HYG / High Yield Corp. Credit, one of the biggest levers is not only flashing negative divergences as I have shown, now they are seeing actual price movement as HYG closed red today, it's first serious divergence (price) with the SPX which is the leading indicator signal we look for with HYG (the divergences are a warning it's coming).

 Pro sentiment is falling off as well.

And for the only the second day, 30 year yields are now severely dislocated to the downside, you may have seen the earlier post in which they led the SPX up, now they are deeply leading down.

Here's a better scaled chart intraday...
 Remember yields are one of my favorite leading indicators because of their reliability, they tend to pull equities towards them (down).


 HY Credit...

And for the first time this year, PIMCO's HY fund that has supported the SPX's 2015 range has diverged for several days, not once before.

Perhaps worse for the momentum ignition, USD/JPY or just about any JPY cross as the BOJ came out with hawkish statements questioning the effectiveness of their QE program.

For a while I have said, "We're not there yet" because of leading indicators, now that we've made the head fake move which I always estimate at 80% probability in a situation like this, Leading Indicators are turning, the 3C charts are leading negative.

The Dominant Price/Volume Relationships today were mixed and co-dominant. The Dow had 14 at Close Up/Volume Up, the most bullish of the 4 relationships, also the most likely to call a short term overbought condition, usually closing lower the next day.

The NDX saw 50 at Close Up/Volume Down, the most bearish of the 4 relationships.

The R2K was co-dominant between Close Up / Volume Up and Close Up/ Volume Down as was the SPX.

Eight of nine S&P sectors closed green with Materials leading at +1.71% and Utilities lagging at -.46%

Of the 238 Morningstar groups, 219 of 238 closed green.

BOTH RATIOS ARE ON THE OVERBOUGHT SIDE.

Tomorrow is a typical Op-Ex Friday in which the max-pain option expiration pin usually opens around today's close and remains in the area until about 2 p.m. when they are released, the market can do just about anything after 2 p.m. and it has very little influence over the following week, but the 3C data collected the last 2 hours of the day tends to be the best of the week and often gives us an excellent forecast of what to expect.

I wouldn't have put the AAPL Put trade idea out there today, Trade Idea: Short Term Options) AAPL Puts, if I didn't think we weren't at a confirmed head fake move as I like to use the discount and the timing of a head fake move to open option positions at a discount like today's AAPL put at a discount on AAPL's move up, ending with a loss of momentum, Star candle.

While I don't expect a lot of movement tomorrow during the op-ex pin in the obvious part of the market, the averages, I do expect we'll see continued leading indicators and divergences continue to confirm a head fake move which like the head fake move that led to the upside breakout (a bear trap), creates downside momentum by using the head fake move as a bull trap for downside momentum. I also expect when this move breaks to the downside, it won't be at the bottom of the range, but rather a move below it, that's the purpose of head fake moves.

You can almost use the record VIX net spec long position as an example, the momentum caused by the squeeze is what acted as today's lever for the market. In similar, but opposite fashion, a bull trap with traders who recently entered at larger and larger downside losses causes a snow-ball effect of selling. Again, I wouldn't have put out the AAPL trade idea if I didn't think we were close enough as I like to get put timing (options timing) as close as I can, to the minute if possible.

As usual, I'll take a look at futures before turning in, the divergences posted earlier are still there, the NQ divergence is much sharper than earlier. If things continue to deteriorate, I'll update you tonight.















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