Credit/Risk Assets

Here's a look at how Credit and Risk Assets in general are performing today.

 Commodities faltered Thursday, followed by the market Friday. This morning commodities are not sharing the enthusiasm of the SPX as they remain in Friday's range. There is a slight bounce in the $USD on a bit of EUR weakness or weakening that I shoed you in the last post, but it's not enough to explain commodities lack of relative performance today.

 High Yield Credit as I mentioned last week seems to be de-leveraging as it has not made a higher high with the SPX in over a week.

 Rates, which are like a magnet for equities gave an early tip off on Thursday, today they are not moving out of Friday's sell-off range.

 For those who think the Euro correlation is not alive, here you can clearly see the Euro posted higher lows while the SPX was still bottoming, dragging the SPX higher last week, it also warned on Thursday.

 Here's the longer view since QE2 ended and the correlation started coming back.

As for today,

The same enthusiasm is not there, especially recently in the last hour or so, I suspect the SPX is outperforming a bit on the opportunity to fill Friday's gap.

 High Yield Corporate Credit is also underperforming on the day, it seems everywhere we look thus far, the only risk appetite is in equities, not commodities or credit.

 It's been nearly 2 weeks that High Yield Corp. Credit has failed to make a higher high with the SPX, again... de-leveraging?

While Financials are the best performer on the day, they did warn on Thursday before Friday's gap down, there's pretty good performance today, although in the last 30 mins or so it is starting to diverge from the SPX.

All in all, while the equity market points to risk appetite in a gap fill, the rest of the risk market is not so enthusiastic.

Early Sector Movement...

While the averages continue the trend of filling all gaps, there has been some early and interesting sector rotation.

Most notably is Tech which has been strong for weeks and just started showing cracks on Friday, XLK is underperforming the SPX notably. Also underperforming is Energy. Financials are the one risk on group that are doing well thus far today, but even some defensive sectors like Industrials are falling off, while the more defensive plays like Staples, Healthcare, and recently Utilities are coming in to rotation.

I suspect Energy (+.29%) is falling off in part due to USO, but more broadly, the FX sensitive Energy and Materials are seeing a decline in relative performance due to the EUR/USD as the original excitement in the Euro on last night's FX open for the week starts to fade as the reality sets in that the vote was a step, not a solution and there are many more hurdles for Greece. No one even knows for sure what the German end game is, I suspect it will be to make terms so demeaning that Greece cannot accept them, as mentioned earlier, giving Germany a face-saving escape from what they have called a , "Bottomless pit" as recently as today.

Here's the Euro since FX trade opened yesterday.

The Euro opened up after the Greek vote went through, but has since fallen off below its opening levels for the start of the week and approaching the next support level.

ES Addendum

Around the same time in premarket that 3C started leading negative, ES broke below VWAP after having been above it most of last night.

ES Update

Overnight 3C showed pretty good confirmation of ES, until pre-market, then it went negative and by the open or just before was already leading negative.

USO-FADING STRENGTH STILL THE TREND

Oil jumped today on news that two Israeli embassies were car bombed in India and Georgia, however, as has been the trend since the new year, fading strength in USO continues to be the theme.

 This morning's open and subsequent fade,

 Today's daily chart, thus far has kept USO within the down-trend channel, the Trend Channel on a daily basis is also still holding the down trend.

 An early lack of confirmation on the gap this morning.

This is the 15 min chart I posted Friday showing at least 15 different areas where strength has been faded since the start of the new year. We'll keep an eye on USO, but it seems that trend is still intact, even in the face of strong geo-political problems.

Good Morning

As you know, last night while Greece was burning, the parliament passed the harsh austerity measures demanded by the Troika. True to their words, party leaders and Papademos who threatened any lawmaker who did not go along, kicked out an unknown number of members of the PAOSK party were expelled while at least 40 MPs and Ministers resigned. Their resignations, rather then votes seems to indicate this was a fait accompli.


However, as we saw last week in a candid video in which Germany's Finance Minister, Schauble seemed to hint they were making an example of Greece when talking to the Portuguese Finance Minister, reaction from Germany and the Northern countries has been muted if not critical. The Troika keeps changing the rules or moving the line  and this morning seems no different. Remember there is a vote in Germany Wednesday whether to go along with the bailout, so it is not a done deal by a long shot and even that may be pushed back until March!


Comments from Schauble today echoed that reality,


"Greek promises on austerity measures are no longer good enough because so many vows have been broken and the country that has been a "bottomless pit" 


"With a new austerity programme they are going to first have to implement parts of the old programme and save."


Cutting it close...


"Germany’s finance ministry said the country won’t give its final approval for the new aid payments until early March — after there is clarity on how well a debt relief deal with private bond holders would work and its parliament has voted on the new measures."


"National parliaments in Germany, Finland and the Netherlands will have to vote on the second bailout package. Since those countries are traditionally most critical of bailouts, the votes are unlikely to happen before there is clarity on whether the bailout deal will actually make Greece’s debt sustainable again."



"Now we need to wait and see what comes after the legislation," Economy Minister and deputy Prime Minister Philipp Roesler said on German television.

"We have taken one step in the right direction but we are still far from the goal," he said.

Austrian reaction, too, was muted.



"Adopting the austerity package is one thing, implementing it is another, and this is something in which we have to place great store," said Austrian Vice Chancellor and Foreign Minister Michael Spindelegger.

Greece has until Wednesday to commit in a written statement to the changes voted on last night, however the populaces' anger may change the look of the government in April, which may also see Greece back-track on the austerity measures.


If there was one thing the Troika didn't want to hear and fears,


 "Samaras, the current front-runner to replace Lucas Papademos, told parliament last night: "I ask you to vote in favour of the new loan agreement today and to have the ability to negotiate and change the current policy which has been forced on us".


Greece is still far away from the next tranche and it seems like Germany will keep forcing harsher and harsher demands until Greece can no longer go along, which gives Germany an out, such as, "We tried, they wouldn't go along"


Next up, expect news from Germany about an EU Finance task master embedded in the Greek constitution.

Swing Trade Layout

Still making progress on the Swing Layout, although there's still more work to be done. There are a few different charts in the layout, depending on how you want to trade, your risk tolerance, market conditions and timeframes.

 This particular layout has condition markers in red at the bottom, the conditions include:trading with the trend in the stock, trading with the trend in the sub-industry group, stochastics and RSI in a favorable place, a small pullback against the trend before entering and a few other things. So when there is a red marker and a red candle on the same day, those tend to be the highest probability areas to enter the trade.

 This is another indicator, when red the environment is more favorable for swing shorts, when light blue, more favorable for swing longs, there is still some work to be done here though to trade with the trend. The volatility stop indicator can also be used rather then the candlestick color.

Three's also an additional Trend Channel stop system I'm still putting together that allows you to get out sooner at a better price on extreme moves or oversold moves in the case of the short trades in the trends shown above.

Updates from Greece...

When I read these update from the rioting in Greece before parliament's vote tonight, I was reminded of the end of the movie, "Gang's of New York" when the telegraph reporter voice over said things like, "this building is burning", "there have been reports of looting", etc, it was in the final scenes if you recall the movie.

These updates have a similar tone...

• FTW: Public order minister resigns in Greece as fires burn - BBC
  
• Rioting spreads across central Athens, at least 5 buildings set ablaze - AP 
• 2:02PM EST: FIRES ARE BURNING SEVERAL SMALL BUSINESSES AROUND ATHENS AS PROTESTERS CLASH WITH POLICE NEAR GREEK PARLIAMENT
• 1:52 PM EST: POLICE ARE CLEARING PROTESTERS FROM OUT IN FRONT OF GREEK PARLIAMENT BUILDING
• 1:50 PM EST: ATMS ARE REPORTEDLY EMPTY AROUND ATHENS... STILL UNCONFIRMED WORKING TO CONFIRM THIS 
• 1:48 PM EST: LARGE FIRES ARE REPORTED AROUND ATHENS... INCLUDING A BRANCH OF EUROBANK AND STARBUCKS
• Skai TV reports that police have run out of tear gas & have asked for more supplies to be brought

Arab Spring, Be Careful What You Wish For...

During the Egyptian protests to ouster Preident Hosni Mubarak, I often pointed out that Egypt is truly governed by the once, well respected Army. Every President since Nasser has come from the military and has essentially been chosen and backed by the military. The Arab spring was convenient for the Egyptian Army as a cover as Hosni was preparing his son to take his place, by-passing the long standing military authority. Because of this, the military was going to remove Mubarak, Arab Spring or not, it just so happened to be a useful cover in forcing Mubarak from power, while not disclosing to the Egyptian population that their real rulers and oppressors were the military which the Egyptian people held in such high esteem.

Once Mubarak was removed, the military was to rule the country for 6 months until democratic elections could be set up. I warned back then that the military was unlikely to cede power to a democratically elected president, which at this point, may very well have been an unfriendly (to the west) member of the Muslim Brotherhood, which received unprecedented support from countries such as Syria, Iran and Lebanon as extremist slipped across the border during the confusion and helped the Muslim Brotherhood get organized. This is very reminiscent of the second Iraq war in which US troop rolled in to cities expecting to set up local governments only to find they were already in place and running smoothly, this was because Iran had slipped in to the country and set up these governments in anticipation of the fall of Saddam. This gave the majority Shiite population considerable influence, as they were once treated as second class citizens under Saddam's rule.

A year later Egyptian's are rising up again seeing that the military did not keep its promise and has no intention of doing so. This was predictable before Mubarak had even been disposed. I further pointed out that even in countries like Iraq and Afghanistan, whose leaders recieve unprecedented support from the US, can barely project power outside of their capitals and this is nearly a decade later. Tearing down a government is the east part, creating a western friendly government with real credentials is next to impossible and it's not just Egypt, but Tunisia, Libya, soon to be Syria, maybe Iran. The fact is after the the conquest of the middle east by the British, arbitrary borders were created which pitted deeply divided religious factions against each other, such as in Iraq. It is reminiscent of the Rwanda, when the Belgians had created a colony there with the ruling minority, the Tutsis being deeply hated by the Hutus. Once Belgium left Rwanda and abandoned it as a colony, the majority Hutus who had been treated badly by the minority Tutsis, had taken their revenge and over 750,000 (some say up to a million) Tutsis were murdered, mostly by machete in 100 days.

An excellent book on the subject is called,

"We Wish to Inform You that Tomorrow We Will Be Killed with Our Families"

Unfortunately the Middle East shares many of the same cultural problems and divides that were rooted in colonialism. It's Interesting that the US has killed or deposed so many former friends, take Saddam for example, for 40 years he was the CIA's top asset and during the Iran/Iraq war, Iraq received unprecedented support from the US, not to mention Osama Bin Laden who was once "friend" to the US during the Soviet occupation attempt in Afghanistan. It's amazing to see how many government's have been targeted by the neo-cons and then also see Rumsfeld in decade old photographs, politely shaking hands with our former friends.

Mubarak, another former close friend of the U.S.

Even Gaddafi had managed to rehabilitate his reputation and became friends of the West under George W. Bush, Stratfor ran a column story about this called, "Killing old friends" and of course there is the book, "Confessions of an Economic Hit Man" in which these governments were approached by people like the author, if they didn't do what the West wanted, then the, "Jackals"  were sent in.

The point being, western democracy is has little in common with the power structures of the middle east, we can even see divides in Western Democracy between the US and Europe. Inevitably, Western Democracy in the MENA region is ultimately set up to fail.

The point being, while we are all very focused on Greece and the EU more broadly, there is a storm brewing in the Middle East that will re-shape the middle east and the world. The consequences of which will be more dramatic then a sovereign default.

I was reminded of what I had said about Egypt when I looked at today's Drudge headlines and saw this story, confirming everything I had said BEFORE Mubarak was deposed of power.

Again, this isn't an immediate problem for the market, but in formulating your views of the market, whether they be short term or long term, you cannot ignore what is happening in MENA and what history has taught us, which essentially boils down to. 'this WILL NOT end well" and the next crisis outside of the EU is taking shape right now in Africa and the Middle East, two of the most explosive areas in the world. There will be consequences and the market will react to them. While I don't recommend trying to be a political or history major, I do support understanding the fundamentals of what is going on in the world, often they are quite predictable, however the outcomes can be far from predictable and it only takes a brief misunderstanding, a single assassination to change the world forever. Lets not forget how World War 1 started with an assignation in Sarajevo during June of 1914.

World War 2 had its origins in the Great Depression as well as nationalistic tensions in Europe. Ironically we have the same set of circumstances unfolding now, economic recession as well as nationalism as the Greeks are humiliated by what they see as their German oppressors.

This is just one of many scenes in Greece in the last 24 hours as sentiment toward Germany has hit all time lows. The burning of the German flag and Nazi flags are a regular occurrence in Greece right now.

Even more shockingly, the Greek Police who have faced rioters for over a year now, just released a statement yesterday which seems to threaten IMF representatives with arrest:


Greek Police have accused EU/IMF officials, in a formal letter, of "...blackmail, covertly abolishing or eroding democracy and national sovereignty"


You never know what the spark will be and often most will not see the spark as being of consequence, history tells us differently.  

VIX / VXX Volatility Surge and the Closing Trade

Complacency in the market may be coming to an end, as many of you know, the VIX/VXX trade inversely to the market, so today's biggest move in 3 months in both is certainly something worth noting as all of the pieces have been falling in to place since my bear market rally post last Sunday.

First the VIX

 Today was the biggest percent gain in the VIX in exactly 3 months, it decisively broke the downtrend line (remember the VIX trades mirror opposite the market so a rising VIX accompanies a falling market, yet the price loss today did not reflect the severity of the move as VIX did. The underlying conditions are much worse then the percentage loss today suggest,

 The VXX moved up on an enormous leading positive 3C divergence on a 60 min chart! Huge accumulation of volatility as if someone knows something.

 VXX 30 min 3C supports the accumulation.

As does the 15 min chart, both locally and long term.

 This is the first break out of the Trend Channel for the VIX since the market rally began, the red square doesn't count because it did not close above the trend channel, also note the close within range indicator has shown the VIX closing higher and higher within its daily range.

 The VIX also has a strong RSI positive divergence

 Here's the daily 3C VIX positive divergence, this one stronger then the last and the last was at the July drop in the market of 16% in 2 weeks.

 The VXX also broke its trendline on the highest percent move in exactly 3 months.

 This was the highest volume for the VXX since September 2011.

The VXX also broke out of the Trend Channel suggesting the downtrend is over and since it trades inversely to the market, that suggests the uptrend in the market is about over.

 The late day rally attempt got no support from high yield credit as it remained at the day's lows.

 I suspected this move was bogus and some sort of possible bull trap, as you can see and I mentioned this earlier in the day (That I would be interested to see if there was any support for the move or if it was a manipulation) the Euro had nothing to do with the move up as it remained virtually flat.

 High Yield Corporate Credit did not support the late day move either, it actually sold off to new lows in to the move. Today was the single worst day for High Yield Credit since before Thanksgiving, as I suspected earlier in the week, de-leveraging and short selling seem to be the theme by smart money as the NASDAQ's short interest is at 10 year lows and the NYSE's is at 4 year lows, dumb money remains wildly bullish, having been seduced by what is almost certainly a bear market rally as I laid out last Sunday. The move in credit is very significant as Credit Leads Equities. Don't forget we have seen a lot this week, the ATR of the market's rally cut in half when it should have been rising if the rally were healthy, massively negative 3C divergences, the Cats and Dogs rally that almost always precedes a move down in the market, and numerous other indications.

 Late day, the rally was supported almost exclusively by defensive sectors, especially utilities, Staples, Basic Materials, Industrials (Blue Chips stocks), only financials showed any risk, for the first time this week Technology went out of rotation and this as the market tried to rally at the close.


The first time the SKEW Index rose, I caught the rise before it started by seeing what others missed, a rise in the Rate of Change before the move higher became apparent, I mentioned that again late this week and the SKEW Index is near its highs again, making a big jump from yesterday at the red trendline. The SKEW Index tries to measure the probability of an improbable event, specifically a black swan or market crash, the higher SKEW rises, the higher the risk of a market crash. $115 is the average, $144 is one of the highest reading it has had historically in over a decade of CME research, many of the high readings led to market crashes, we are now at a very high level that should be making bulls very nervous. Like I said, the last month has been like picking up loose change in front of a steam roller and even after the market breaks, the bulls will still buy the dip, bear market rallies are fierce and psychologically like a super weapon, but we'll cross that bridge when we get to it, but every metric we have seen this week including today's breadth post have all pointed to a internally very weak market, a facade if you will that has lifted bullish sentiment to crazy levels, but the underlying conditions for anyone who does a little digging, have been atrocious. Remember, just about every thing you see on a price chart alone is a deception or a trap waiting to be sprung.

If you need proof, just examine your own emotions lately, your emotions are almost always the best indicator, but in reverse, meaning if you are very scared, you are probably on the right track, if you are very hopeful, you are likely being set up for the fall.