There weren't really any smoking guns today, nothing too far from what I expected yesterday. CPI data came in this morning a bit hot at 2.1% which is above the F_E_D's mandate or preferred 2% range, the problem is that the trend in multiple economic reports other than just CPI have been showing a developing trend of inflation which I mentioned the day before the last F_O_M_C which Yellen played down as "noise", but the F_E_D has grown considerably more hawkish since with Bullard's "The market is wrong...The market doesn't realize how close we are to our goals", meaning a rate hike which I suspected came from the top even though Yellen sounded like a complete dove at the post F_O_M_C press conference, the minutes though revealed something quite different and it was clear Bullard was sent out with Yellen's blessing and since it has been one after another including Yellen herself testifying in front of Congress making some contradictory, yet much more hawkish statements. Initially I thought this was all about inflation, the one thing that would force the F_E_D's hand on rate hikes no matter what they may want to do,
however since then it seems it's not just inflation, but falling real wages, the "Stag-flation monster".
In that context, it would normally make no sense at all for the market to be up today on the hotter CPI data, but this isn't a market that is discounting on the fly just as of yet, even though it has moved away from the Bernanke put and is discounting as it has not been since 2009.
The reason in my view is quite clear, just take yesterday's switch from SRTY which I closed at a 9% gain to open URTY yesterday on expectations of the IWM finally bouncing off the 10 min positive divegrence in place for over a week. Here's yesterday's decision to make the move,
Trade Management: SRTY/URTY and here are some of the charts behind the decision which I was not completely comfortable with...
IWM / SRTY / URTY Follow Up.
As I said yesterday, a "Rising tide lifts all boats", so logically it would have made sense to close SQQQ and FAZ as well, but the chart support for that trades was not there leading me to believe the Russell 2000 would show significantly better relative performance than QQQ, SPY, DIA and Financials, as it turns out it did and I closed the URTY long today
, Moving Out of URTY and Back to SRTY, as charts started deteriorating,
SRTY / URTY / IWM Follow up, as I'm not going to make the same mistake when we called the AAPL top, were all set with a short and then chased a small bounce only to see AAPL run that divegrence over on news Third Point had eliminated AAPL from their top 5 holdings sending AAPL from all time highs to a loss of -45% in 8 months.
That's the mistake I don't want to make with respect to the broader market and the reason I didn't flip SQQQ and FAZ which turned out fine as the URTY +3.6% gain for the day hedged the entire portfolio and added some green on the day.
Despite the Russell 2000's outperformance today, it is still -0.5% year to date.
I suspect as I did for most of the last week that the IWM has more of a bounce in it, however there was deterioration today, that doesn't mean we can't bounce more, but in the absence of an excellent reason and entry in what I'd consider a counter-probability trade, I'd rather have the default positions set to longer term core shorts which is why I moved back to SRTY today which is already at a gain. If there looks to be a strong opportunity for a trade, I'll take what the market gives, but this is not the same trading environment of 6 months ago, this is the higher volatility, more unpredictable environment that surprises you with a gap down from overnight trade on something like Banco Espirito Santo contagion of the European periphery as we have already seen. While we are on the subject, another linked ESI company, RioForte sought bankruptcy protection today so the Portuguese contagion story is far, far from over and NOT priced in the market despite what the talking heads may be saying.
This morning was interesting as I posted earlier, we have seen these pre-market gold dumps and saw another today that seemed to be the typical pre-market futures gold dump, but this one came 9 minutes before CPI was released on a positive divegrence (the dump was accumulated) only to see gold futures shoot to 1316 on the CPI release (inflation as gold is a natural inflationary hedge), this was a clear set up.
At "A" gold futures are dumped 9 mins. before CPI and are accumulated at lower prices, at "B" CPI comes out, gold shoots up 12 points to 1315 and at "C" there was already distribution as the trade was done, whether this was coincidence or not at "D" the fall accelerated as the Housing data was released, I tend to think they were unrelated.
However the question still remains as GDX and GLD to a lesser degree have been some of my favorite long term longs and we did great with a +40/+50% long NUGT position and have been waiting on a pullback since...
With this GDX negative divegrence, it should have pulled back a long time ago and we should already be long NUGT rising the next wave higher, however as posted in yesterday's SLV update,
SLV / Silver I'm starting to wonder if the GDX/GLD and SLV bases which are typically bought on inflation EXPECTATIONS are now discounting and distributing as the F_E_D's cure for inflation is going to be the same that drives the market lower, HIGHER RATES, SOONER AND FASTER THAN THE MARKET EXPECTS, which is the thrust of Yellen's warning at her Congressional testimony if you listened closely. Perhaps the market is rethinking how far the F_E_D will let inflation go before reacting with a heavy hand.
One of the best ways I know to determine what's really going on is to get some downside movement and see if it is accumulated because right now we have a typical distribution range and some serious negative divergences that HAVE NOT led to a pullback. This is also why I haven't been posting any NUGT/DUST trades, the signals haven't been there and price shows why. Gold and Silver had mixed closes.
Treasuries did take the inflation data serious this morning as the 5 year, 10 year and 20+/30 year yields all closed regular hours at the lows of the day, meaning the normal treasury/market correlation was inverted today, Treasuries were bid in what looked like a flight to safety during a risk on market move, however it looks to me to be all about the CPI print and F_E_D rate hikes.
HYG and most High Yield credit was up on the day as we expected from the divergences seen yesterday, however credit did dislocate to the downside in to the close, it's not the smoking gun short term for an IWM led bounce that this is for the bigger market picture...
This divergence between HY Credit and the SPX should be taken VERY seriously,
this is one of several reasons I was willing to sit through a bounce and maintain shorts like SRTY, "A trader that can be both right and sit tight is a rare thing", it's more about the sitting tight with signals like this and again, note the intense deterioration as of July 1 as soon as Window Dressing for Q2 ended (we are seeing this everywhere).
My guess from intraday 3C charts is HYG has some more support to lend the market, but just as bad as this chart is, don't forget the HYG divergence.
No matter what the intraday HYG short term divegrence is, it doesn't come back from this (4 hour leading negative divegrence, intense distribution and again, right around July 1).
As for sectors today, it's almost a mirror opposite of yesterday,
Daily Wrap . Seven of Nine S&P sectors closed green, the laggard was.. you might have guessed it, Utilities, but only down 0.21% (A flight to safety trade). In similar fashion, of the 239 Morningstar Industry and sub-industry groups I track, 205 of 239 closed green, almost the mirror opposite of yesterday again.
The Dominant Price/Volume Relationship for the component stocks of each of the major averages was mostly Close Up / Volume Up which is the most bullish, but often leads to a 1-day overbought event with the next day closing lower. Ironically the Russell 2000 is the only one without a single dominant relationship, it was split between Price Up/Volume Up and Price Up/Volume Down which happens to be the most bearish of the 4 P/V relationships.
I didn't like the daily closing candles for most of the major averages and feel fine about having closed URTY and back to SRTY as the default core position, this doesn't mean an IWM led bounce is over, but there are breaks and noise days and with larger upper wicks on the daily candlesticks (higher prices rejected) in the SPX, R2K and the NDX with a small body on the day.
Bigger picture, the VIX is showing an interesting candlestick pattern.
The last 4-days in the VIX candlesticks is a bullish pattern called "Rising 3 Methods" which is a consolidation/continuation pattern implying a move higher in VIX (obviously lower in the market). The 3 candles since Thursday have all fallen within Wednesday's real body which is the formation. While it is called "Rising 3 methods", the number of candlesticks inside the body of the large one do not have to be 3, they can be 4, 5, 6, etc. as long as they stay within the real body of the large candlestick.
All things considered, I would take this candlestick pattern seriously as well.
The SKEW Index remains elevated for a 23rd consecutive day, which should be very disconcerting for any market bulls. This is the longest period at elevated/red flag levels since the CBOE started publishing SKEW. This means premiums for deep out of the money puts are on the rise as there's a perception that there is tail risk or what is more commonly known as a higher probability of a Black Swan event/Market Crash.
Guess when the SKEW moved in to the red zone? June 19th, the day after the F_O_M_C.
As far as Index futures go, there was a little more damage in Russell futures than I expected this early as they were leading positive and are now in line, ES and NQ (SPX and NASDAQ Futures) are just seeing plain, all out damage.
The 5 min r2K futures was leading positive which is another part of my reasoning for moving to URTY yesterday, today that has deteriorated a little to in line.
ES is just seeing all out damage as is...
NQ
For the time being, I expect the IWM to continue to lead its bounce with a rising tide lifting all boats, however relative weakness in the other averages. We'll just monitor developments as the bounce we expected last week and got in the SPX and Q's was not nearly as strong as anticipated with immediate distribution in to the first day of higher prices, something that is a definitive change in character as we use to see several days up before distribution would start. The IWM did show distribution today on the move, which is the reason I moved out of URTY and back to SRTY.
Just as a reminder to keep your eye on the prize and the strange events that have taken place since July 1st, here are some breadth charts as I am posting several a night to try to keep everyone sharp and not just focussed on intraday jiggles.
The percentage of NYSE stocks trading 1 standard deviation above their 40-day moving average, note the severe decline and especially since July 1
This is by far the deepest decline in a non-piullback situation.
Percentage of NYSE stocks trading above their 40-day moving average, also a severe decline, the biggest for a non pullback situation and starting in earnest at July 1
The Most Shorted Index which has been used to ramp the market via short squeezes is just seeing deterioration which makes sense with the indicators above as well as the one below..
The NASDAQ COMPOSITE's Advance/Decline line which has been ugly for several months, but July 1 started something new altogether.
The key to July 1 is nothing other than the first day of trade after Q2 window dressing which is just a big deception.
Now we can add the Baltic DRYS Index to the charts of concern as it just hit 18 month lows and the worst July since 1986. I know about the overcapacity, but do you think that really matters when 2014 GDP revisions look like this?
World GDP 2014 Consensus
Our MCP positon started showing some interesting signals, interesting enough for me to put this out yesterday,
Trade Idea: (short term options) MCP Call and the reason as of yesterday...
MCP Chart follow up
The 5 min chart above is significantly stronger in a large leading positive divegrence, I suspect something is up.
As for earnings tonight, you probably know AAPL beat on EPS, Gross Margins and Mabook sales and missed on Revenue, I-Phone sales and like NFLX last night, gave lowered guidance expectations which is all Wall Street really cares about. AAPL closed AH -0.58%.
We'll just keep doing what we do until the next signal, but with leading indicators, credit, breadth, 3C charts, etc all falling off a cliff, I'd be thinking about how you want to be positioned for something more than the next week as the unpredictability of this market is rising exponentially and not in a bullish way.
