Market Internal Risk and ES

 As mentioned last night, ES was running WAY ahead of the risk basket, today you can see a return to the median as ES trades very close to the risk basket as it should.

 In actuality the risk basket is performing a little better then ES, I'm guessing it's the typical market pendulum action in which ES went too far north of the risk basket yesterday and has snapped back a little bit too far south of the risk basket today, but it's much closer to what would be expected.

ES is trading exactly at its VWAP (Volume Weighted Average Price).

At least today we don't have any major games of "rush to fill the gap" as we saw yesterday and the market is functioning in a risk off mode as would generally be expected.

This just reinforces my view from last night that momentum was used to push in to an unfilled gap where the market makers and specialists likely had inventory at those levels and thus a loss until the gap was actually filled, which allows the middle men to sell the inventory or even go short there.

Back in the USSA

Wholesale inventories were released about an hour ago... in a nutshell, "Not good".

Released on 11/9/2011 10:00:00 AM For Sep, 2011 Prior Consensus Consensus Range Actual Inventories - M/M change 0.4 % 0.6 % 0.3 % to 0.8 % -0.1 % As you can see, this driver of US GDP missed consensus badly (.6% with the previous at .4%) coming in at a negative -.1% This would be the first time Wholesale Inventories (something that has propped up GDP for several years) has declined month over month since December of 2009. I should also point out the 2010-2011 trend is alarming as with any other trend, a series of lower highs and lower lows is a downtrend, with both lower highs and lower lows in place, this doesn't bode well for US GDP.

SPY/DIA retraement complete

 DIA has now retraced 100% of the rally from Monday's lows to Tuesday's highs.

 The QQQ has fallen just short of that target.

The SPY has retraced 100%

This is likely to be a short term floor of support for the market to bounce off intraday, a break below this level will be extremely bearish. The fact two days of rally have been erased in an hour of opening trade is quite bearish.

EIA Petroleum Report

The report showed a decline across the board, which is bullish fro crude and USO's initial reaction has been favorable.

Here's the EIA figures:

Released on 11/9/2011 10:30:00 AM For wk11/4, 2011

Prior Actual Crude oil inventories (weekly change) 1.8 M barrels -1.4 M barrels Gasoline (weekly change) 1.4 M barrels -2.1 M barrels Distillates (weekly change) -3.6 M barrels -6.0 M barrels

Here's the initial reaction in USO...

There's been a bit of a pullback, but I wouldn't all it a reversal just yet. If USO can't hold $36.50 today on that report, something is not right with the stock and I would certainly consider an SCO long position.

USO Update

The DOE inventory will be out before I finish this post, but here's the USO update.

 This breakout from a bearish ascending wedge has been highly suspect and we'll come back to this in  minute, but the level that I consider to be a confirmation of this breakout as a head fake move was and is at $36.50, we're $.12 away from that level.

 The 2 min chart went negative yesterday in to the close and has had no problem confirming this morning's drop.

 As you may remember, all USO timeframes were negative, this is the 5 min

 And the 15 min in a leading negative divergence, even with this drop today.

This is the short on USO, SCO an inverse crude ETF, I commented last Friday that the base is so linear that I would expect a downside breakdown before any move up, which would mean USO would have to breakout as well, the USO breakout from a bearish pattern is highly suspect, so in essence, what was most likely to happen in a bullish case for SCO and bearish case for USO has happened as false breaks are almost always the last thing to occur before a trend reversal. We'll see what the DOE inventories do.

Italian Yield

Until  can afford a Bloomberg Terminal (HA!) I'm looking at the latest headlines and all I know for sure is the yield is over 7% today as per IB Times. Additionally, as to what that means in real terms to you, here's some context.

"Portugal, Ireland and Greece all were forced to accept a rescue package once their national bonds reached that emergency yield.

Moreover, Italy has to roll over more than 360 billion euros ($491 billion) of debt in 2012."

In other words, we are approaching the EU end game fast, there are still volatile events that may occur, the most obvious is LCH back peddling on the margin hike, but Goldman Sachs seems to think the margin will be increased by another 10%, of course yesterday they said a floor on Italian bonds was put in and no doubt selling them to their clients, which as of this morning may already be former clients on the massive loss they took overnight. The second thing will be ECB printing, although Germany will likely throw a fit, I think the ECB may not have any other choice. That would cause some upward volatility, but keeping the big picture in sight, as we have learned here in the US over the last 3 years, printing more money hasn't done anything to resolve the crisis and thus would be a blip.

The fact is, Italy has crossed the threshold, trust is greatly diminished. The Berlusconi news yesterday is yesterday's news and the market is now grappling with option #3 I pointed out last night in Barclay's assessment. Should LCH pull their margin hike, again it will cause a volatile spike, but further undermine trust and without consistency, investors will back away from Italian debt ever faster.

Europe is approaching the end game and look at the speed in which it has happened. Several weeks ago the fears were centered on Greece, a few weeks later which is a nano-second in market timelines, Italy is about to bring the entire EU crashing down.

GLD is lost

Gold doesn't seem to know what to do this morning, it should be down on a stronger dollar and it should be much higher on a flight to safety trade; it has been flip flopping between the two for months, today it looks like it can't decide.

GLD +.07%

ES Overnight

It appears this move by LCH was front run

You may recall that ES had a negative divergence going in to after hours trade, but this is later in the early morning. note the unusual volume as well for early morning ES trade.

SPY 2 day retracement

The SPY has retraced nearly 80% of the rally from Monday's lows to Tuesday's highs just on the opening indication.

It's Accelerating

Like I pointed out last night, the mistrust and the rumors, revisions and clarifications are head spinning.

LCH raised margin requirements to trade Italian bonds and rightly so, yet there are rumors already of LCH taking back some if not all of the margin hike after seeing what it has done to the bond market and market in general. Here's an article from the WSJ on the subject.

And here's the response from Peter Tchir in the article...

"I suspect LCH will retract some (if not all) of the margin hike on Italian debt.  That should give a brief spike to the market.  How much of this move is related to LCH’s move is debatable, but if they go back to original margin requirements and bonds don’t respond extremely well, then look out.  I actually don’t think bonds will do that well, because the damage has been done, and if the LCH reverts on margin, look for articles questioning how safe the LCH is.  There is a reason they have these margin requirements – to protect the people who trade on the platform.  If they cave, expect short term bounce, but longer term issues."

As is explained above, even if the margin hike is reversed, this causes trust issues that will have longer term damaging effects on the market.


This is the situation that I was trying to explain last night, trust and credibility are evaporating rapidly.