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Thursday, March 14, 2013

Short and Long-term Market Analysis from Wolf on Wall Street

This is one of the rare posts from 
Wolf on Wall Street
I post here, it's meant for members and I have a responsibility to them and their financial well-being first and foremost above anyone else, but every now and then I think there are some issues that are just too big to not share with anyone who really wants to beat the market by bettering their tools and thought process, if you just want to stick to the Technical Analysis Dogma of the last Century, Wolf on Wall Street isn't for you. In fact, we're often using Technical Analysis against technical traders just as the market does.

Here's tonight's post, I hope you enjoy it. Feel free to email me with any questions and I'll do my best to get back to you quickly.

Daily Warp-Rare Rant
Tonight I am going to try to cover things from start to finish, hopefully succinctly, but I doubt it so maybe bookmark the post to come back to if you don't finish it or need to take it in again.

Starting with overnight trade (Tuesday/Wednesday), last night I showed you the futures that again were looking like they were carrying more concern than the typical look they have of, "Lets get ready to be ramped", I covered them again last night because I thought it important and maybe because there's a little bit of a trend developing.

I'm going to address some tinfoil hat conspiracy issues in another post, but the idea here is that sometimes the market or markets to be more precise, that are being manipulated gets away from the manipulators-they create so many complicated and unsound derivatives and other mechanisms to kick the can that eventually the spider web is just too complicated to hold any longer.

Asia isn't holding recently overnight, the Nikkei breaking its winning streak 2 nights in a row and SHCOMP down 5 nights in a row are seemingly the weak links (albeit for different reasons that are unique to each country and at odds between the two). Interestingly if you compare the SHCOMP to the SPX, they tracked each other nearly tick for tick at the start of the year, but then something happened...

Shanghai Composite in green, SPX in red... This makes me ask, why did the SHCOMP diverge (and go red on the year today), what is it telling us about the global economy and market that the US markets are seemingly just grasping, but inly after pulling dumb money in as we have shown with an exceptionally low volatility ramp without a single correction? Who wouldn't be tempted to put their money back in the market?

If we accept that Central Bank policy has been the driving force behind the US stock market and world market recovery (to one degree or another), what is different about China than the US and what is the leading indication? I've been putting the pieces together, building the case, lets try to put what we have all on the same page.  Lets explore...

 As I have been saying for well over a week now almost every day, the PBoC is NOT happy with hot money flowing in from every developed country on the face of the planet and specifically with Japan and Shinzo Abe. The Japanese situation in China's view will only cause more problems for China as Abe's new picks for Central Bank governors take their place at the BOJ. I posted about this situation over the weekend and told you that you'd have to read between the lines, the first lever China is using is one they absolutely know Abe can't back away from and that's the row between the two countries over the Senkaku IslandsChina is letting Japan know that if the nationalistic fervor in China against Japanese imports isn't hurting Japanese exports enough, if they keep up with the BOJ "stimulus", things are going to get a lot worse. Understand that the G7/G20 didn't call Japan to task recently over their increasingly aggressive currency devaluation because the hypocrisy would have been so laughable that the organizations would have lost any credibility they think they have left. However, while everyone else in the G20 is pumping money in to their economies via their central banks, China is draining money through repos and the reason is the same reason I've always given that motivates the Chinese government, the one thing they are more afraid of than anything - their own population growing dissatisfied, this is why the Senkaku Islands were the perfect lever for China. Whenever a country is having economic problems, they need to either find some way to create a nationalistic fervor or be at risk of being on the receiving end of the discontent - look at the reasons the World Wars started in Europe.

Overnight the PBoC made a statement that "Inflation expectations must be stabilized and that great importance must be attached to inflation". Adding to the Chinese worries was the People's Republic of China's State Administration of Foreign Exchange, which made a statement that said the G20 should refrain from competitive currency devaluations or what is known as a currency war-this coming from China who use to be synonymous with "Currency Manipulator".

 What is happening in the world that we know for sure creates inflation? Central Bank easing and in the Asian theater, the biggest debaser of currency and threat to Chinese inflation is Japan, however they aren't the only threat. Last night Soc. Gen. released a note called, "A Strong Case for Easing Korean Monetary Policy".

If this all seems a little far removed from analysis of the Stock Market, let me just try to make this more to the point. When every major developed country either voluntarily enters the currency war or is forced to, the results are the same, currency valuations fall in an effort to maintain competitive exports relative to other counties' currency valuations, in brief, a sort of trade war. This creates more currency which as we saw during the F_E_D's QE2, drove commodity prices through the roof until just about every sector was feeling a margin squeeze due to rising input costs, now imagine this on a never ending global scale. Emerging economies were expected to do well during that period, they didn't for 1 reason, the US was exporting inflation as all of the newly created money was invested in Emerging Markets which drove their inflation up. Now imagine all G20 countries are engaged in this behavior, however China is doing the exact opposite as they have been doing with repos and draining money out of their economy to try to control already high inflation in property values and soon food prices, guess which country becomes a magnet for all of this newly created hot money? If you said China, now you know why I have been posting about thousands of dead pigs in Chinese rivers (which if it turns out to be a real viral problem and gets out of hand, will drive food inflation and political instability) and other stories related to China. 

While we are on the dead pigs floating in a river in China as someone who raises pigs doesn't want to be identified (ask yourself why?), apparently this story is turning for the worse in a country that is known to manipulate the press to control these stories. More dead pig carcasses have been found in a second Chinese river. It seems highly decomposed pigs where found in the Hubei river as the number of dead pigs in the Huangpu river have crossed over 6000 as of yesterday. For anyone else this is just an interesting side story, but we have to consider that food inflation in China accounts for the highest component of CPI food inflation in the entire world as Chinese pig production is higher than the rest of the entire world combined, so if this is beyond a local problem and becomes an epidemic, the already crippling Chinese inflation will soar, which will drive growth and stock prices down. Or how about this, as traders, we get paid to think out of the box, to see what the crowd misses; what if the pig problem isn't really an epidemic, but the Chinese people who are highly distrustful of the government controlled press don't accept the answers being given and decide they don't trust pork anymore and stop consuming it? The effect is the same! 

China knows they have become the magnet for all of this newly created money and no matter how much they drain, they can't offset the rising tide of newly created currency being invested in China that continues to grow due to "Competitive Currency Devaluations", sound like anything China is worried about, anything they have been talking about as recently as last night? 

If the currency war, which has seemingly already started with full G-20 cooperation and Shinzo Abe is one of the main perpetuators as he tries to pull Japan out of 20 years of deflation, gets worse, it causes Chinese inflation which  they can't afford as they are already fighting it via repos. Understand this, the PBoC has already accepted China will have to accept lower growth rates to combat inflation,  Zhou used the very words "HIGH ALERT" with regard to inflation jut last night- this is NOT the normal language the PBoC chief uses as he tries not to rock the market. If the currency wars go nuclear, China will have to drop a bigger bomb which is lower growth, we could follow that all the way to negative growth if we enter the extreme and this is what the stock market is apparently starting to discount-first in Asia, but there are signs already in the US.

Lets consider Europe for a moment, even if we look at last night's data release-Eurozone Industrial Production for January missed horribly at -0.4 on consensus on -0.1 which is down from December's revised 0.9 which means recession in Europe is growing worse.

Italy (which is a huge story in its own right via elections alone) saw a very disappointing bond auction overnight. Germany's Commerzbank said it would raise $2.5 bn eur. that will be used to repay funds sending the stock down somewhere around 10% during the European session. That's last night's EU news alone. However the real story there is the elections, it seems the Goldman Sachs plant, Mario Monti is out of a job. Did it really take a stand-up comedian named Bepe Grillo who essentially won the Italian elections to tell us, Mario Monti is "a bankruptcy trustee on behalf of the banks" and that Italy will be booted out of the Euro as soon as EU banks recoup their money, Grillo's idea, hold a referendum vote as to whether Italy should stay in the Euro and basically get the bankers before the bankers get them, it worked pretty well in Iceland under slightly different circumstances, but the gist was the same-"Get the bankers". In his interview from which the above tidbits were gleaned, he also astutely asked the question which I have been saying all along (more on that after), "We must still ask: What happened to Europe? Why do we have no common information policy, no joint tax policy, no common policy of immigration? Why has only Germany been enriched?" As to what I've been saying, The Euro exists for one reason, to create a free trade zone for the largest manufacturer and exporter in Europe who apparently has the most sway in the EU as well over policy and bailouts as we have seen, Germany.

Lets go to the US where we are in a "Jobless recovery" and if you understand how the BLS counts jobs you will understand this is a jobless recovery (I may post more on this subject-US jobs data specifically) and if you understand our last GDP print was barely revised from a negative print to a barely positive one simply to avoid the possibility of the "R" word being used on a possible second negative GDP print in which the "R" word, recession, would be used,  then ask yourself, could our markets be frothy or bubbly considering this chart?

Just remember, this isn't the first Central Bank created bubble, ah... Tech, Property and uh... this one, what will this bubble be called? The Seasonal Adjustment? The Golden Parachute? The Recovery that wasn't? The Jobless Recovery? Be careful, lest the light at the end of the Central Bank tunnel be a railroad train...It's happened before.

I thought you might find the long term 3C SPX chart interesting.

Serious distribution in to the 2007 highs, the same time CNBC was giving a lot of press time to the author of "Dow-20,000", what's that tell you about their judgement? Remember I said we saw a lot of Plunge Protection Team intervention in to the 2009 lows, to the point we could call intervention within 10 minutes of price moving? Here's accumulation at the 2009 lows, it seems Wall St. was well cued in to the idea stocks were going higher from there while most traders were waiting for the next leg down.

We see distribution as QE2 ends and ever since the worst leading negative divergence in the 9 years of chart history here, for most averages, it's the worst or even worse since the year moving in to 1929 before the crash.

It would almost seem like the market was more stable before the "President's Working Group on Financial Markets" was created and enormous power was given to the Treasury, the F_E_D, the S_E_C and the CFTC.

Here's another interesting long term chart, the NASDAQ 100
Remember, a signal has to be strong to move to the longer charts. Here we see price/trend confirmation as the NASDAQ made its way higher during the 90's and suddenly went negative very quickly just before 2000, then leading negative in to the first quarter of 2000. There was large accumulation into the 2002/3 lows as a new 5 year bull-market was about to get under way-you see what I mean about smart money knowing way in advance? This is when Home Builders were under huge accumulation, who would have thought after the Tech revolution that housing would lead the next bull market? Someone knew, Home Builders were accumulated for a year and a half during the Tech melt-down. Note the distribution in to the 2007 highs, then there wasn't enough accumulation at 2009 lows to register on a 5-day chart, but the distribution after QE2 finished was clear and the leading negative divergence the worst on record for the NDX.

The fact smart money knew what they knew raises a lot of questions in my mind about the President's working group on the financial markets, not only did the entire tone and volatility of the market change, but I've never seen divergences so strong except in 1929 for most of the 20th century. One day I'll post charts showing all of this.

By the way, that would have been 1988...

And how about this more recent chart?
Does it seem the Dow is robust or perhaps "we" (meaning the "We" who tries to move the market for headlines) is increasingly desperate to keep the Dow green for the sake of the headline of "New High" alone? Are those new highs you would buy? Statistically speaking the Dow closed green for the 9th day in a row which is the best performance seen in the Dow in 16 years, it kind of makes you wonder if this is the best economy that traders are anxious to bid up with market breadth falling horribly, market volume falling horribly (in fact volume on the NYSE was the lowest of the year today ex. President's day), retail running away from the market again after being hoodwinked back in to the market earlier in the year on a low-volatility melt up that didn't see 1 single pullback for an entire month? Or? Perhaps the SPX NEW HIGHS headline is the only thing the invisible hand thinks has a chance in creating real organic demand without messing with the VIX, AAPL on occasion as we saw this week, Transports and anything else they can use to push the market higher and transports were certainly higher today!

I'm not arguing March has seen some demand in transports, compare IYT (Transports) to the Baltic Drys Index (daily shipping rates for dry goods-ex petroleum, etc.
 The BD Index has seen some demand in March, however it's no where near on par with the moves in Transports/Dow-20 broadly speaking when given some perspective...

Transports in green and the Baltic Drys in orange, just off 3 year lows while transports are at all-time highs?

Perhaps I've digressed a bit too far from the Daily Wrap.

Getting back on subject... As posted last night with the negative 3C divergence in futures, they fell all night initial this morning's 8:30 release of US Retail sales which beat on a "Seasonally Adjusted basis" and beat big, but remove the seasonal adjustment (as we have talked about so many times over the last year as the ultimate form of outright data manipulation) and Retail Sales for February actually posted a sequential decline, the first since 2010 and only through the subterfuge of seasonal adjustments did a decline actually turn in to a beat of consensus, briefly sending futures surging...
Amazingly interesting as wel was the positive divergence in ES futures right through 8 a.m., 30 minutes before the data was released-anyone who was accumulating over that time period in advance of the Retail Sales, easily made money on the release of the data as you can see. Hmmm?

Another interesting thing happened today, this time in Euro/FX land due to weak Italian bond auctions and some undesirable news out of Germany with regard to Germany's second largest bank in need of raising $2.5bn in capital.
 The EUR/USD broke $1.30 AGAIN...

 Remember when we first started watching the first couple of 5 min chart lower highs and lows with interest? It led to this down trend, but...

It seemed Draghi was backstopping the EUR/USD at $1.30, but how much longer can this go on?

The effect on the market as we are well aware of the correlation?
Virtually nothing!

Except the disconnect between the pair and the SPX grew...

However since we all know it's the $USD correlation that really matters...
What does this mean for stocks? The USD in orange/SPX in green. It seems the $USD is surging and the last time the $USD was at this level, the SPX was lower by about 135 points. Thankfully the VIX can only be pushed to zero before it can't be used to levitate the Dow to close green.

What else happened in leading indicators?

Unlike yesterday's VERY algo driven day, the CONTES model for ES dropped out with ES, although there were some notable pushes at the EOD to keep the Dow in the green and the S&P which was quickly losing it toward the EOD until about 3 p.m. as it is still about 11 points short of making a headline new high.

Also around 3 p.m.

The formerly leading and now lagging High Yield Corp. Credit and Junk Credit...
 High Yield Corp. Credit (HYG)

The intraday 3C chart (as we already know what the bigger picture looks like)...
Distribution in to the early highs and price fell as it should, then a positive intraday divergence form a couple of hours before the move, someone knew they were going to move HYG higher today. This is only a 1 min timeframe so most of the movement here is generally market makers and specialists.

Longer term, as we already know...
Distribution in to the short squeeze, JNK looks exactly the same on this longer term-more important 15 min chart.

Junk Credit

Where monkey-hammered around 3:00 p.m. as the SPX had been falling...
 HY Corp. Credit wanted nothing to do with SPX intraday highs, at least until the SPX was sliding during the afternoon session until Credit was pushed, note the extreme move right near the close

Junk Credit was ambivalent at best intraday, again until the SPX needed a little help, again note the close in credit as the SPX started to lose the 3 pm rally.

FCT which is disconnected and has a little more of a sense of self-preservation wasn't caught up in this non-sense.

 FCT longer term vs the SPX (green)...

And intraday...

Yields, which typically act in a leading capacity as a magnet for stocks actually fell right at 1 p.m. as the myth of the rotation from bonds to stocks was proven wrong again (if there's any rotation its from money markets and and savings accounts to bonds and that has slowed) at the 1 p.m. 10 year note auction.

Yields fell as the 10-year auction of $21 billion at 1 p.m. saw yields fall to 2.029% (vs Feb. 2.046%). The "When Issued" at 1 p.m. was at 2.053%, this seems to indicate there was a flight to the safety of bonds as we have seen in the 3C charts of TLT recently. Other internals of the auction such as the high bid to cover, huge indirect of 47.7% and the second lowest Primary Dealer takedown in history at 22.3%-in other words, the internals were stellar and the idea of front-running the F_E_D was not at all apparent in the auction.

Here's the 3C chart for TLT-the flight to safety trade...
You can see distribution on this important 30 min 3C chart during Feb., since then a range has developed as we typically see during accumulation and we have an enormous leading positive 3C divergence suggesting huge accumulation as TLT is held near accumulative levels of VWAP.

***I'm not even sure how to take this as I've never seen it before, but the P_O_M_O operation today by the F_E_D, which Bernie swore under oath, would not monetize the debt, did exactly that, but strangely they took down a 30 year issue (identified as CUSIP 912810QZ4) that isn't even available until the Treasury's auction tomorrow of 29 year and 11 month issues, which strangely includes the CUSIO identified as 912810QZ4, the same one the F_E_D bought today, apparently before it was even for sale?

Strangely commodities didn't play along with the SPX today...
 As you can see Commodities lost ground and didn't recoup much intraday

This in itself isn't strange as commodities lost their correlation with the SPX after QE2 ended...
 As was mentioned before, QE drove commodity prices so high, there was a margin squeeze so bad in just about every business that dealt with physical input costs.

Strangely QE 3 didn't revive commodity inflation, whether that was the F_E_D figuring out how to drive down commodity prices without effecting stock prices (as both are risk assets that should rise as such) or we are simply seeing no demand for commodities as recent evidence would indicate, one story you might remember is the Chinese Foxconn (maker of AAPL products) suspending all hiring due to slow demand for Iphones.

The Carry trade didn't help the market's today, in fact one would think they'd be down looking at the carry trade in FX...

Volume was the lowest of the year today (ex President's day), yet Transports (IYT +1.53% and DJ-20 +1.63%) somehow managed a strong day while the Dow-30 was up a titillating +0.04%-Seriously?


There was no perceptible Dominant Price/Volume Relationship today. As far as Breadth Indications, they have been weak on days the market is up recently and weak overall for the year and beyond.

Breadth REALLY Stinks
 The McClellan Oscillator- as mentioned yesterday (not specifically about the MCO either), the most effective use of oscillators in my experience isn't their typical use, it's divergence analysis so I'm not making that up for the sake of this chart as I was already on record. The MCO failed to post higher highs from mid-November through mid-January, it went negative from there and specifically has been negative in to a rising market recently.

 Looking at the history of MCO divergence analysis: Neg. @ the July/August fall of nearly -20% in the market; Pos. at the Oct. lows; Neg at the Q1 2012 highs we shorted; Pos @ the June 4th lows we bought; Neg at the Sep 13th QE3 announcement; then MCO NEVER WENT POSITIVE AGAIN, it's now in a deep negative divergence.

 % All NYSE Stocks > 40 day moving average-this should be rising in to a higher market, since January at 85% of all stocks above the 40 day, it's now at 61% with the last 3 days moving lower in to a higher market/Dow-30

  % All NYSE Stocks 1 Standard Deviation Above their 40 day moving average- These are strong stocks, they maxed at 70% in Jan and are down to 46%, that's not good.

  % All NYSE Stocks 2 S.D. above their 40-day moving average- these are momentum stocks, the strongest, they have gone from 44% to nearly half that at 23% and have lost nearly 6% over the last 3 days in to a rising market.

  % All NYSE Stocks above their 200-day moving average- This is a basic measurement of the health of a market, it should rise in to a higher market, instead it's lost 10% and spent the last 5-days moving even lower in to a higher market-if this market hasn't been manipulated to give the Dow the best closing performance in 16 years, I don't know what manipulation is!

  % All NYSE Stocks 1 Standard deviation BELOW their 40 day moving average-these are weak stocks, they were at a low of only 6% and have moved over 400% higher when they should be moving lower.

  % All NYSE Stocks 1 Standard Deviation BELOW their 200-day moving average- these are really weak stocks, formerly at lows of just under 9%, they have moved up to over 16% and have moved higher the last 4 days from 13.5%-this is bad market breadth, more and more stocks are falling a standard deviation BELOW the 200 ma!

  % All NYSE Stocks 2 Channels BELOW their 200-day moving average- these are the weakest of stocks-WAY BELOW their 200 day m.a's, a nearly 300% gain from a low of 2.44%, but more importantly they have moved higher the last 6 days while the DOW has moved higher, they should be making new lows! Even worse, they're up 11 of the last 12 days from 3.59% 

 The 4-wekk new high/low ratio, which should move up in to higher market highs, they peaked at 93% and are down to 85% and lower 5 of the last 6 days.

The best way to use this indicator is with a moving average, note the move higher with the market earlier and the move to lower highs since...bad news.

So, the Dow has 16 year best closing performance with gains of +.05 and +.04%, but still head line grabbing, while nearly every measure of market breadth falls apart.

OK, moving forward, lets take a look at what's going on tonight.

In FX...
 The EUR/USD is still well below the $1.30 ECB backstop, so it remains to be seen whether France or Germany wins this one, I'd think Germany and the EUR climbs back above $1.30, but news of Troika talks with Greece breaking down tonight and delaying the next tranche of aid means Greece's mainly EU bank creditors won't be getting paid, that may pressure the Euro more in the near term until that situation is resolved.

However, interestingly and this is only short term 1 min intraday so far, there's movement in the Euro June futures.
Distribution I'm guessing around the time of or just before the Greek/Troika talks news, but since there has been accumulation in to the lows. This is still only intraday, we'll need some more time to see if there's larger accumulation, but this could be movement by the ECB's partners to push the Euro back above $1.30, I'm guessing we'll see that soon, whether it holds or not?

 The Australian dollar surged on Thursday as startlingly strong jobs data led themarket to almost abandon any chance of further rate cuts, sending bonds yields flying to the highest since April last year. In looking at the single AUD futures, I'm going to say the $AUD is going to slide a bit off what looks to be a bit of an over-extended knee-jerk reaction.

In Equity Index Futures overnight...It looks like there's some strength building heading in to the European open. I'm guessing there's some strength developing too for the SPX new highs judging by the short term NASDAQ futures, however the longer term charts look like none of it will hold, if we confirm tomorrow in regular hours, we sell strength hard, that GOOG trade will probably be looking good.

 ES 1 min going in to the European open looks like it sees some strength on accumulation

 The longer term chart is still negative, well see what it looks like tomorrow.

 NASDAQ futures have an odd short term leading positive divergence, it's odd to see it at this time of night, perhaps it builds even more.

 Longer term NASDAQ charts though remain weak

 R2K futures are nearly exactly in line short term

Longer term they aren't looking so good, my guess is we see weaker relative performance from the R2K tomorrow, it doesn't mean a close down, but weaker than say the NASDAQ.

I know this is a lot to digest, but I hope you can take it in, I think there's some important stuff here.

See you in a bit


Brandt Uses Worden's TeleChart and StockFinder 5 Exclusively

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