Tuesday, December 17, 2013
" But what’s important when you’re in that hedge fund mode is to not do a thing remotely truthful, because the truth is so against your view that it’s important to create a new truth to develop a fiction. " Jim Cramer
"A lot of times, when I was short at my hedge fund and I was positioned short, meaning I needed it down, I would create a level of activity beforehand that could drive the futures. It doesn’t take much money. Or if I were long and I would want to make things a little bit rosy, I would go in and take a bunch of stocks and make sure that they’re higher, maybe commit $5 million in capital to do it, and I could affect it.These are all the things you must do on a day like today. And if you’re not doing it, maybe you shouldn’t be in the game.
This SPY 5 min positive divergence from last week had us all set with long positions by Thursday the 12th, the SPY has popped a bit since then and is still positive in the short term cycle.
There's a clear delineation between the 3 or 5 min QQQ 3C chart (short duration, small accumulation) vs the larger charts starting at 10 mins.
Another change of character as we see deeper and deeper distribution is 3C itself, while this divegrence is actually much longer, note to the left there use to be at least an inline move in 3C to the upside, now it's just negative to the downside, my interpretation is distribution is heavier and heavier.
The IWM is similar.
Last week it was one of the clearest signals of short term accumulation on a 5 min chart, by the 12th we had covered trading shorts and were all set with long positions that have already lifted the trading portfolio from +9% to +15% and the move we expect hasn't even really started or not to the degree I'd expect. Remember as I often say, Wall St. has a reason for everything they do, Cramer outlined how they do a lot of this in the interview above, 3C is showing the literal, actual evidence of that. The point is, most of the time to accomplish something, the market must be driven to emotional extremes, thus my earlier description of the market being like a pendulum on a grandfather clock, no small adjustments to the real discounting of value here and there as "Efficient Market Theory " would suggest, however there's no randomness to price moves either as we can see as "Random Walk Theory" would suggest. The truth is what I'd prefer to call the"Invisible Hand" as we don't know exactly who is creating the movement: herding of funds following order flow, the NY F_E_D's Open Market's Desk or what some call the Plunge Protection team, the Bank of International Settlements?
What we do know is that manipulation, even blatantly illegal manipulation of the market is so common place as Cramer says, no one cares because the SEC doesn't understand it or do anything about it and as Cramer also says, "If you're not doing it, maybe you shouldn't be in the game".
To the dismay of many of my students whose first experience in my class was this interview, the truth of the market is as Cramer said above...
" The great thing about the market is it has nothing to do with the actual stocks."
My students, many from a generation that believed the market worked on valuations, were shell shocked the first night of my class, but to be honest about the market, first you must strip away the illusions.
I didn't like it either when I first discovered there was more to the market than what I had spent nearly a decade mastering only to learn that this one indicator I created shattered all of what I use to believe was reality and uncovered the true realities, I agree, the market has very little to do with the stocks, it has to do with the manipulation of cycles in the market and worse.
IWM 15 min...
HYG Credit (10 min) shows the 4 days I was talking about in which they were supporting HYG before the NFP on 12/6, then HYG moves up triggering the SPY Arbitrage to support the market, remember this was at the NFP when the market should have gone down by anyone's standards.
The more recent support isn't as active, see 16/17th as the F_O_M_C is tomorrow.
HYG 5 min chart shows the same accumulation the 4 days leading up to the NFP on 12'6, the move higher triggers support from the SPY arbitrage. It seems very clear (as it did before the NFP as I commented on it before the NFP) that the SPY Arb was being used to create a "new reality" in which the market rallied on an NFP print everyone expected to send the market to a deep pullback.
As distribution was apparent the Trading portfolio which was just opened went all short except for MCP and maybe 1 other asset, by the 12th we had covered all shorts for a +9% portfolio gain and by the close Thursday, all long positions were in place, we just had to be patient. A rising HYG is supportive of the market which has been supportive of our longs as the trading portfolio is now at a 15+% gain, the point though is the same kind of support as we saw before the NFP, although not as strong, although today it ended with a leading positive divegrence.
The VXX 10 min chart (which needs to move down to support the market via Arbitrage) shows how they held VXX back from making high highs on the 3rd, 4th and 5th with the NFP on the 6th, that's also when VXX dropped after being pegged in place for 3 days (HYG was being supported the same 3 days plus 1 previous day for 4 days before the NFP).
As for our trading portfolio positions, again by the 12th we had taken short profits and were all set with longs. Note the leading negative divegrence in VXX today, not only has VXX been pegged like the week of the NFP, but today's leading negative on an attempted breakout wreaks of intervention to kill any possible breakout attempt and keep VXX prepared to support the F_O_M_C tomorrow through the same arbitrage mechanism used on 12/6 (Non-Farm Payrolls).
Intraday on the 1 min chart, (remember VXX trades opposite the market), you can see where we covered shorts and entered longs by the 12th we were done. The leading negative divergence of the last 2 days, while only on an intraday chart, is still enough to do the same thing they did with the NFP.
If this is done, the perception will be that the market doesn't care about a strong payrolls report which is the yard stick being used for QE tapering to a large degree, but "IF" the F_O_M_C decides to taper tomorrow, it looks like they have the market set to act as it did on Dec. 6th on the strong Non-Farm Payrolls print, remember good economic news is bad news for QE, but as Cramer said,
"THE MARKET HAS NOTHING TO DO WITH THE ACTUAL STOCKS" and while this is not the same kind of manipulation Cramer was talking about way back then before the first I-Phone came out, his point is the market is rigged, he rigged it when he ran his fund, it's pervasive and his advice was...
"If you are not willing to do this, if you are not willing to foment and break the law, if you are not prepared to do everything you can to prevent any sort of truth from slipping out, if you are not prepared to create a new reality, YOU SHOULDN'T BE IN THE GAME".
THAT'S NOT ONE MAN'S VIEWS, THAT'S THE WALL ST. CULTURE AND DON'T FORGET CRAMER IS GS ALUMNI.
The advantage we have with 3C is we are not trying to determine whether a stock is overvalued or undervalued, it doesn't matter, the only thing that matters is what moves the market, whether it's legal or not, whether it's hedge funds/private equity, the NY F_E_D's Open Market's Desk, the Bank for International Settlements or a mix of all of them as they know what's coming across the tape, 3C shows us what they are doing. We may not know why, we may not know who, but we sure as heck can follow along and rather than fight Wall St. we flow with it.
We can see HYG 9blue) vs the SPX (green) not only has been supported and showing better relative performance than the correlation suggests back on the 13th, but very clearly in the late hours of the morning today with a leading positive relative performance signal.
Note VXX's deeper or worsening relative performance vs the SPX in to the afternoon, it seems clear that the move in HYG endangered the SPY arbitrage so extra pressure was simply put on VXX, likely hitting a pack of stops and sending it lower, in any case, they kept the lever working.
However, levers and tricks only last so long when there's real demand for protection, as you know, I've never seen such a strong 4 hour leading positive divegrence in actual VIX futures below.
VIX did everything we expected as expectations were laid out while VIX was still below the 20-day in November. First the Bollinger Band Squeeze was expected to create a highly directional move, we expected an upside breakout because of the accumulation in VIX futures above.
At B we got the breakout, but we expected price to hang around the area before moving higher and specifically pulling back to the 20-day average at "C" as it did, now we have a 6th consecutive close higher in the VIX, but note today's close is not the strongest candle with a Doji, so if arbitrage is activated, a pullback here is likely, but it won't last long.
If the actual VIX futures divergence isn't enough for you, then check the daily VIX 3C divergence.
High Yield Credit is not used for the SPY arbitrage, in fact it's not used for any manipulative lever so it's a good barometer of what credit is really doing. Looking at a longer 15 min chart, HY credit's leading negative position looks a lot like 3C's leading negative divergences in the same place, it wouldn't be surprising, after all the mantra is "Credit leads, equities follow" so if HY credit is leading, 3C is following, price is deceptive right now, but these levers can't be maintained for long especially as more and more of them break or don't work like they use to if at all.
HY credit vs the SPX intraday
As for sentiment, out two indicators show pretty decent sentiment here, the other...
intraday we saw reversion to the mean (which I talked a lot about the other night and posted an article about), that's in the green box, however it seems that the SPY arbitrage moved the SPX (green) away from reversion to the mean right around 11 am , the same time the lever was pulled and created a area where the SPX is rich vs Yields which act like a magnet so short term, the SPX is rich, but we know that's because of the manipulation of the SPY arbitrage, they can use it all they want, as long as we are on the right side of the trade.
The longer term has shown the SPX lower and likely to pull up to what I thought would be the $1800 level to revert to the mean. Also note that Yields didn't make a higher high today so they are already starting to lead negative as they do so well. To the left at the white arrow, Yields were making higher lows and highs as the SPX was still making lower lows, it called the move up in the SPX.
SPY 5 min, like I said last week, the positives stop at 5 mins for the most part, you can see where the trading portfolio went short, where we covered and prepared for the next cycle, thus far we still have a 5 min leading positive so I think it is possible either via knee jerk reaction or just flat out accumulation for whatever reason (to make a QE taper not look so bad, to take advantage of leaked information-who knows?) , as long as we are on the right side of this trade, we know what the highest probabilities look like, we know how fast and how many changes of character there have been. Price is deceptive, but if we can ride the coattails, why fight them?
At the very next timeframe, there's a clear leading negative divegrence so we already know what we want to do with higher prices if we get them other than take profits on select trading longs.
Isn't it interesting that the SPY intraday chart saw accumulation around 11 a.m., either the algos, the market makers/specialists or some other tape readers knew what was going down, we didn't have to know the arbitrage had been activated, all we had to know was what smart money was doing and toward the EOD, things got a bit ugly.
Just like I said last night, if we no longer have a valid reason for keeping trading positions on the long side open, they will be closed and moved to ash or whatever opportunity may present itself as high probability.
All new divergences start on the fastest charts so the positive in the 1 min VXX charts along with the negative in the SPY charts both at the EOD, may in fact be a change of direction, I said numerous times the past day that I would not be surprised if this bounce was over BEFORE the F_O_M_C. If it is not or if it gets even stronger, we know they are either running the market for the QE reaction like the NFP reaction or they have inside information, IT WOULDN'T BE THE FIRST TIME THE F_E_D HAS SENT PRIVATE EQUITY (154 FIRMS) INFORMATION (THE MINUTES) A DAY AHEAD OF THE RELEASE AND EVEN WENT THROUGH THE TROUBLE OF EMAILING IT TO THEM. *AS A REMINDER TO SOME OF THE LONGER TERM MEMBERS. WE DID CATCH AN OBVIOUS F_O_M_C LEAK ABOUT 2.5 YEARS AGO, IT WAS ABOUT 2 HOURS BEFORE THE STATEMENT AND STOOD OUT SO BOLDLY THAT WE MOVED WITH INCREDIBLE HASTE TO GET REPOSITIONED WITHOUT EVER QUESTIONING THE SIGNAL AND WERE CORRECT.
IWM 5 min doesn't have the same strength as the SPY, but we've seen this all week, remember, "Thee IWM leads the market?" The positive divegrence on the 11th was clear as day and caused us to enter URTY which is at a profit.
Intraday it's interesting that the IWM had the same exact positive divegrence intraday as the SPY on the SPY arbitrage activation around 11a.m.
QQQ 3 min with the leading negative that caused us to open the first positions in the trading portfolio on the short side, then they were covered and we entered longs and were done with our work by the close Thursday. We have a leading positive in to the close today.
QQQ 5 min shows last week's positive divegrence clearly and the in line status at the green arrow, that's time to be patient, today's close was not very pretty at the larger block trade sizes.
This is the flight to safety in to the CHF, we've seen it a lot lately, it looks opposite to the normal FX pairs because this is $USD/CHF meaning long USD/short CHF so a drop means CHF is seeing higher prices.
Long term or highest probabilities we have not only the typical distribution range, but an enourmous leading negative divegrence (distribution) so I wasn't keen to let go of the short in the trading portfolio, but...
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