Whatever Gores Your Ox

by gmak

The tiny island of Iceland is disrupting the world once again. This time it is with the ash from a volcano that is grounding airplanes all over Europe. Is it my imagination, or has seismic and ‘beneath the crust’ activity been greater in the last year, than in memory?

Yesterday certainly put the probabilities to the sword. SPX opened higher than the previous close and never looked back, closing at the high. I thought that ESM0 would never hold 1202 – and I was wrong. Never underestimate the persistence of a thirsty cow smelling water.

There was a brief moment where Bernanke forgot to say that free money would be available forever in his testimony – the EURJPY took an instantaneous dive – but the equity markets didn’t even notice. Liquidity will trump probability every time. I’m not going to belabour the point because many are the laments of the bears about this market, and adding my voice won’t accomplish anything.

The retail numbers yesterday beat expectations. Whether or not it is a survivor bias doesn’t seem to be the point – the market responded with what it believes. The survivor bias says that the increase was due to many retail closures and the benefit accruing to the survivors. I’m not sure if the number is same store sales. However, when this is combined with anecdotal evidence of hiring, companies beating EPS estimates (including UPS), it is a potent mix for the algos in a low volume market.

Perhaps, it is the fact that about $8 billion in mortgage payments are not being made every month. That’ll buy a few iPads, no? There is a double benefit in that the banks don’t have to mark these to market, so their B/S remains intact.

Welcome to the broken clock, where jumping a bar buried in the ground is considered a beat. Still there is no denying that there are signs of a recovery, even if it is sporadic, isolated, and patchwork.

BUT….

Dallas Fed’s Richard Fisher said that “his Bank’s board of directors recently requested an increase in the primary credit rate. The request was made out of a desire “to normalize” the spread. “We would like to get it back to 100” basis points.

As well, he has joined Hoenig in requesting that the FOMC drop the “extended period” language for low interest rates.

Tick. Tock. Tick. Tock.

– – – –

I was too busy yesterday to go provide additional information on the bearish ETF reverse split trade, beyond a comment.  Here is some more colour on this trade. LEt’s take the example of a 3x bearish ETF. Both it and the underlying have the same price to start, say $100. If the underlying falls to 97$, the 3x bearish ETF goes up to $109. So far so good. Now let’s say that on the next day, the underlying goes up $3 to $100 – essentially unchanged for the two days. This is a 3.09% increase. The 3x bearish ETF now has to fall 3 x 3.09% = 9.27%, which takes it from 109 down to 98.88.

The ETFs are based on the daily PERCENT change in the underlying, and this means that in a “back-and-forth” market, they will lose value as sure as the clock is broken. Adding to this is the fact that the market is running up with wild abandon – which hits the 3x bearish ETFs very hard. Just keep those stops appropriate against a reversal or correction – because we are in heady territory here – and the trade starts to provide a good risk / reward profile.

The reverse split puts a lot more meat on the bone to be gnawed away by whip-sawing markets (or bullish markets) and the daily PERCENT change curse. An ETF will always fall more in price difference when the daily percent change is against it, than it will go up in price when the daily percent change is in its favour (a bullish ETF drops more in price when the underlying does, than it goes up in price when the underlying does).

What some traders would do is to short BOTH the bearish ETF and the buillish ETF, since the daily percent change curse ensures that any back and forth movement will erode the price of both. If the market does run in one direction, HOWEVER, that ETF rising in price starts to see greater increases than the other ETF falling in price – again due to the same percent change math.

If there are any questions about this, ask in a comment.  I’m sure that there are a number of traders who can provide insight into the harsh world of being long an ultra-ETF.

OverNight

Asia was green – but developing Asia was red. It looks like a rotation away from the risk trade (this used to take longer than 1 day in the normal universe). The plunge in EUR overnight supports this view. It appears that it was the result of EURJPY selling (the reverse of the carry trade that has been on lately). There are rumours of a revaluation of the Yuan. As well, China appears to be ready to take harsh action to deflate the housing bubble – and we all know where that leads in terms of liquidity and credit deflation (neither of which is any good for equity markets).

The DXY is stronger. I would expect ESM0 to be down, and it is – but not that much. When I look back on yesterday, the SPX just marched straight up in a 45 degree slope with nary a deviation from its intended path. These things just don’t happen in the natural world.

Europe is mixed this morning, but the ‘biggies’ are all green. The DAX is flat, more or less, after a dip in the early morning (NY time). ES mirrored this dip, so there was likely something hitting the wires. The DAX has since recovered. Rotation is into Utilities, Industrials, Telecom and InfoTech. Financials are flat. Materials, Consumer Staples, Discretionary, and Health Care are all red. Breadth is strong in both directions.

DATA

Today is Jobless claims, Empire Mfg at 8:30. 9AM, the Net TIC flows show up and we can see how much of the Treasury and Equity action was due to foreign money, and how much was just the FED printing. Right after that is Industrial Production and Capacity utilization – and I will be looking to see if these numbers confirm the retail and inventory numbers from yesterday. They are expected to be up over the previous month.

I have something more for the subscribers.

Click here for the SPX daily chart

Look at the most recent bar and how it has moved above the purple dashed line that began April 6. If today opens higher than that close, and closes even higher – then this farce will continue longer than the single hair covering Trump’s head.

SPX closed just above the blue TD Retrace line, which should indicate the end of the mini 5th wave (TD Waves are sequential and not nested like EW waves). TD Pressure, which was about to go below the red signal line (at the bottom of the chart) – after showing a divergence with SPX – suddenly pushes it’s way up to the highest value possible = 100. If today opens higher than the previous close, that indicator will start to show a pink box, as the one from the middle of March – and the result for SPX should be about the same = more upward movement.

None of this appears natural – but who cares. I’m here to make money, not to be right about everything. One day there will be a financial reckoning, but if I keep playing the bias of it being NOW…. no, wait, NOW… I mean, NOW…. then I won’t have any risk money left to deploy when the laws of physics and math come to pay a call on the accounting lies. So long as there are shorts in the market, the IBs of the world, with free money in their pockets and no accountability, can push the markets up – until they are able to get rid of their toxic equities such as the 5 horsemen of the B/S (C, Ambac, BAC etc) who account for a good chunk of the NYSE volume.

I looked at the probabilities again – and no surprise, with Tuesday and Wednesday’s bar shapes on the daily SPX chart (a ’45’ followed by a ’15’) – that for Thursday, there is a 53% probability that CLOSE < OPEN, and a 40% probability that CLOSE > OPEN, and 7% that CLOSE = OPEN (in terms of being in the same area of the bar). This suggests a down day off of the open.

SPX has now been above the 55-day SMA for 31 days in total. It is 7% greater than the 55-day SMA. This is a rare event.  SPX has only been this far above (> 6%) 8.6% of the time.  However, if we look at only the positive numbers, then SPX can be this far or further for 13% of the time. This translates to around 4 days for the current run. By coincidence, SPX has already been > 6% above the 55-day SMA for 4 days.  As with everything else, SPX’s relationship with the SMA is in unprecedented territory for a run of this length above that SMA.

I’m not going to play the potential correction. I’m going to wait for it to become obvious. Like I said, if SPX opens higher than Wed’s close and closes higher, then all bets are off. This index IS going higher in that case. If that happens, those reverse split ETFs look doubly attractive as they will be hammered with a continued run up. Here is the link to the list again.

The Bollinger signal is invalid on the VIX. This index closed lower than the previous day’s close and did not manage to reset by getting outside the lower Bollinger. If today is an up day, then it may get below.  15.45 is the magic number for the close on the VIX to begin the 3 day signal for a possible correction.

See here

Bottom Line

The markets don’t make sense. But, it looks like the inverse correlation between SPX and DXY is back on for a little while.  The VIX Bollinger signal needs a reset. Patience is the watchword, so it’s stay on the sidelines except for the Geronimo or Zero supported scalps. After all, it is OPEX week and nothing is what it seems – especially at the lower volumes.

The EURJPY sold off heavy, and all the shorts who covered last Sunday must be kicking their collective butts. When this flow turns, the markets need to be driven from somewhere else – where will the liquidity come from?

When I don’t understand the cause and effect, I stay away. SPX is way out at the end of the flag pole, and the EUR has become schizo. I’ll follow the major airlines and stay grounded until the ash clears.

My Best Regards.