In Friday's "Week Ahead" we did expect some early strength based on where the 3C charts left off, if this chart picks up where it left off as is the case much more often than not, I'd say we'll be on our way to the finishing of this cycle and the weakness for the week also in the Week Ahead forecast."
Sure enough, right from last night's Index futures divergence, seen below, again from yesterday's Daily Wrap, Index futures did nothing but decline all night.
The following ES Index futures' chart was from about 7:30 last night. The overnight session saw a decline that swallowed the parabolic move to the upside the last hour and a half of trading Monday by the time the market's this morning's, A.M. Update.
It seems a couple of factors were in play, not the least of which was the psychological magnet of NASDAQ 5000, but as we always say about chasing, it's dangerous. One of the key components of Technical analysis is price confirmation which means a lot of traders would have BOUGHT the NASDAQ yesterday as it crossed above $5000, this morning or this afternoon, all would be at a loss. In fact, some of the major average took out a week's worth of longs in less than 3 hours this morning.
While the psychological magnet of $5000 is in play for a specific reason (these posts do not directly address the psychological pull, but do explain motivation and usefulness of moves like yesterday as head fakes or "Failed breakouts"... * Understanding the Head-Fake Move Part 1 and * Understanding the Head-Fake Move Part 2.), there were other extenuating circumstances that made hitting the psychological magnet easier which should be anticipated most of the time as there's a lot of free-bees up there and a lot of potential pain for retail traders.
As mentioned earlier today, Technical Analysis teaches to buy breakouts and short breakdowns on price confirmation. If you remember and understand the 3 places we'll short a Head and Shoulder's top and the 1 place I will NOT, then you can understand the psychological magnet breakouts as head fakes, it's the exact same concept just in reverse.
In any case, whether you believe this, whether it has been your experience or not, something was VERY ugly about yesterday's underlying trade as seen on the QQQ 1 min chart from last night posted above.
Today I mentioned the mental / psychological expectations we sometimes place on the market and the realities that often include from 2 to 3 changes in trend intraday (remember there are 3 trends: Up, Down and sideways). I mentioned that it's common to see the first change on the cash open, the second around mid-day or the European close and the 3rd in to the afternoon or closing trade. This morning's pre-market ugliness did not see a bounce to the upside as is normal in a market that's trending above its 10 day moving average on an overnight decline, rather it moved lower and by noon the SPY had taken out 6-days of longs, and every average other than the Dow was now red on the week (note this is just minutes from the European close.
While Actavis might not sound like a big deal, this was the second biggest debt placement ever only behind Verizon's in 2013, with $21 bn in 18 month floaters to 30 year fixed sold. The yield on 10-year Actavis debt was nearly 1.75% higher than a 10-year US Treasury and the auction went off with 4.5x more money willing to buy than what was available for sale. I have little doubt that our Feb. 24th TLT/TBT , TLT / TBT Spec Position, was a direct result of the Actavis offer and rate lock in place until the issue finished auction today.
I even said in the post linked above re: TLT/TBT,
"I still expect a very short term TLT pullback as I have maintained since yesterday, this is very short term. That should loosen up downside pressure on the market during any such move"
The reason is simple, with falling Treasury prices, bonds yields increase and we have been using yields as a Leading Indicator for years now both intraday and longer term.
Take a look at Yields since our post in to today's close and the close of the Activis issue.
However, while that may have contributed to yesterday's gains in the market, the 3C QQQ chart is undeniably ugly...
From yesterday's chart... The divergence was so strong I had trouble scaling it t the chart. Consider this as the Q's gave up a decent portion of their gains today and looked like PURE DISTRIBUTION yesterday, as a rate hike is expected sometime soon by the F_E_D (yesterday's WSJ/Hilsenrath article put a majority of F_O_M_C members seeing rates at the end of 2015 at 1.13%, well over the market's F_E_D Funds futures which are pricing in half that at .50% by the end of 2015) with the Actavis issue oversubscribed by 4.5x, meaning $4.5 offered for every dollar of debt available or over $90 billion offered on a $21 bn offering, does it maybe not make a little sense that investors were rotating out of risky equities and in to fixed income? $90 billion dollars doesn't just fall out of the sky (not to suggest that the Actavis issue is better quality than a US treasury, it isn't for sure, but yielding nearly double for a 10 year bond). Ironically, the rate lock and increasing yields would have likely made it possible for the NASDAQ to hit 5k.As mentioned earlier today, once the Activis auction was complete, 3C signals didn't look quite as decent as they did earlier, there's a decent chance that yields are about to fall now that the rate lock due o Activas' offering is over.
The deterioration in intraday breadth can be seen in this late day Quick Market Update.
Additionally...
SPY intraday
Don't get me wrong, I'm not building any macro case here, we are talking about short term intraday movement after all of the averages closed red today after the big breakout that prompted CNBC to ask If it was "Different this time?" yesterday, the sure-fire sentence used at every bubble / top that I've researched since the 17th century Dutch Tulip Craze.
I believe the reasoning was that in 2000 there were companies like Pets.com...Did everyone forget how the market got here? It sure as heck wasn't on its own!?!?
And our we still in QE or is the F_E_D unwinding its balance sheet? I couldn't believe they seriously asked the question is it different this time, but everyone always makes that case in a bubble, it's the number one way of knowing you're in a bubble.
Additionally the 19x trailing 12 month EPS that the talking heads say isn't far off the 14x trailing earnings average and thus "Not expensive", should be viewed as it is, with distortions and all such as the fact US companies have been operating in a zero interest rate policy environment for 6+ years now with the F_E_D expanding its balance sheet by roughly $4trillion dollars since 2008, certainly boosting corporate results and allowing them to borrow cheaply, but what have they been borrowing for? Cap-ex, equipment upgrades, modernization , hiring, expansion? No, they have been artificially boosting earnings with share buybacks. According to Bloomberg in 2014 S&P companies spent $565 bn on buybacks, that's 58% of corporate earnings on share buybacks to boost current earnings at the expense of futures earnings as that money didn't go in to the company to improve its effectiveness. Strangely, this is a phenomena that has been present in nearly in the last couple of bull market tops, share buybacks at the highs rather than the lows.
Is it different this time? Heck yeah it's different, but not in a good or sustainable way. It would almost seem like the talking heads still believe the F_E_D is pumping $85 bn a month in to the economy/market and has no interest in hiking interest rates, in other words, undoing everything that got the market to this ridiculous level.
Sorry for the rant, CNBC just drives me nuts ever since the 2007 top when they were pushing the book, "Dow 20,000".
Back to the objective data.
Also in last night's Daily Wrap I posted our DeMark inspired custom indicator showing the VIX with a new buy signal after the VIX saw net longs hit an all time record high in January before being driven down to a current net short position and the indicator giving a buy signal yesterday.
Today VIX jumped to a 1-day 3 week high with an intraday print of $14.69, a day after our buy signal and the next day after our UVXY long.
Speaking of our DeMark inspired custom buy/sell indicator, take a look at it applied to HYG (HY Corp. Credit)...
I'm not going to pretend that today's intraday action was a smoking gun, I think the smoking guss have already appeared and today's price action is a result of such smoking guns such as charts like this...
Today's interesting action was price in the overnight session and first half of the day, the rest of the day looked a lot like a typical intraday jiggle which you'll see on daily charts as well when we are in a primary downtrend, there's nothing exceptional about them,
While not quite as bad as last night's (which also was later at night than presently), Russell 2000 futures show the same late day deterioration in the 3C charts and the same after hours deterioration taking place as we saw last night (again, not quite as bad yet anyway, but I'll check on it again later)...
As for internals, today is the first day in about a week in which we have a Dominant Price/Volume relationship among the component stocks of each of the major averages. The Dow, SPX, Russell 200 and NASDAQ 100 were all Close Down/Volume Down. While we finally got a dominant relationship, it's the 1 of 4 with the least bias, I've take to giving it a knick-name which is, "Carry On", meaning there's nothing about this relationship that would cause a short term (1-day) bias to interfere with its trend. You could say it's the least influential relationship, but it is the most common relationship in a bear market (which is not making any statements or forecasts, just a factoid).
Breadth among the industry groups was HORRIBLE today. Only 2 of the 9 S&P sectors closed green, the defensive Utilities led at +0.61% and the laggard was Health Care at -.91%,
Of the 238 Morningstar groups we track, an almost unreal 37 of 238 closed green, the rest, 201 groups were RED! These two data points usually do point to a short term, 1-day oversold condition, but given the Dominant P/V relationship and volume, I don't see it as oversold, just a bad day breadth-wise.
Additionally today was what we'd call an inside day, in candlestick terms it's the same concept as a bearish Harami although yesterday's candle wasn't quite big enough to look like a strong/valid Harami, but the psychology of the price pattern remains, it's a typical reversal (bearish) configuration.
Just for those of you who like the early "Fade" trades, if we had a gap up tomorrow morning, this would be the start of one of the most common confirmation candles, a bearish engulfing which are commonly seen after inside days/Harami reversals. A Bearish Engulfing needs to gap above the open of today and close below the close of today, engulfing the entire body of today's candle so if we happen to get a gap up, you "Fade" traders might be interested in taking a close look (SHORT) as it's a common candle and I'd certainly put out an update as to confirmation or not. Beyond the candles being commonly seen as bearish confirmation, I have no objective evidence suggesting such an opening.
A quick run through Breadth indicators didn't show anything very different than several charts I shared last night, but the ABI (Absolute Breadth Index) did jump out and catch my eye...
Also the Cumulative Volume Index, the Zweig Breath Index and the McClellan Oscillator are all divergent as well along with the other breadth indicators shared last night.
I'll check in on futures in a bit and send out a note if anything is standing out.
Have a great night.
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