FOMC Wolf on Wall Street Market Update
by Brandt Hackney on April 30, 2014
Since it’s a special day with today’s FOMC policy announcement which was a dud, I thought I might share the Wolf on Wall Street Daily Wrap. I hope you enjoy it.
“Careful” may have been the word of the day from my perspective, there are several very simple reasons for that.
One reason is the F_O_M_C “knee-Jerk” reaction, whether we realize it at the time or not, there’s almost always a knee jerk reaction to anything F_E_D related and F_O_M_C days tend to be the most intense. The initial move, just as I warned earlier today and every time there’s an important F_E_D event, is usually the wrong move or one you don’t want to chase, one that is faded generally within a couple of days, sometimes a couple of hours, but it is a probability.
Another reason is Window Dressing or “The Art of Looking Smart”…
From Investopedia, “Window Dressing” is defined as:
“A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund’s holdings. “
However the practice is much broader than just Mutual Funds and the ambiguous “Portfolio Managers”; it includes hedge funds, Investment banks and even banks looking to shore up capital to appear healthier than they really are. In the case of a bank, they can borrow from the F_E_D on a 1-day reverse repo at the very last day of the quarter, year end or even month’s end as window dressing also takes place at month’s end. The banks borrow the capital on a 1-day reverse repo from the F_E_D and their month, quarter or year end capital looks healthy and the money is returned the next day and they are back to the real capital situation which may be very different than that which is reported.
In fact an article was run this afternoon stating that the F_E_D’s most recent fixed rate reverse repo operation (yesterday) was $208 billion which is the second highest amount EVER! Keep in mind these are 1-day loans from the F_E_D that the banks are accessing. Yesterday was April 29th, today is April 30th or the end of the reporting period for the month of April. You can’t help but wonder why so much money in 1-day loans was taken out by banks right in to the end of their reporting period for April, the short answer is to shore up their capital and make it look like they are healthier than they are, tomorrow the money will go right back to the F_E_D.
Banks are one thing, when we think of Window Dressing it’s usually fund managers selling dogs and buying high fliers so it “looks” like they owned the hottest stocks and not the dogs they really owned, but in most cases, they owned these hot stocks only for a matter of days. While there’s no SEC regulation for monthly filing unlike the quarterly 10Q or yearly 10K, many funds have moved to reporting monthly for their clients and as such Window Dressing has become more and more a month’s end event.
If you look at the schedule of Macro-economic data for the week which you can get from Bloomberg…
You’ll see at the very bottom “Equity Settlement” and for today that is 5/5/2014, that’s because of the T+3 settlement rule, “Trade plus 3-days” so any trade occurring today that will show up as an April holding would settle at latest by the 5th of May (Thursday=May 1, Friday =May 2 and Monday=May 5, trade plus 3-days), thus many times Window Dressing starts before the end of the month, for example to show up as an April holding, the T+3 would require the trade be made by Friday April 25th.
The point is, today we have a mix of F_O_M_C knee jerk reaction (and while the policy statement was released at 2 p.m., the actual statement itself isn’t released until later so the reaction to the wording (and the market will react to the change in the placement of a comma from the previous policy statement) isn’t immediately known, thus the market hasn’t reacted immediately. We also have the end of Window Dressing in which assets are bought or sold for no other reason than to look smart and those same assets may be bought or sold again tomorrow as they are only there so the fund can “Look Smart”. In addition the banks, as noted above, took pout a whopping amount from the F_E_D’s 1-day Reverse Repo facility to shore up their capital structure in an effort to fool regulators,investors and anyone else they need to fool in to thinking they are healthier than they are.
As you can see, there are quite a few transient events that really have nothing to do with anything other than smoke and mirrors, not solid, actual analysis that can be counted on.
In fact, the F_O_M_C policy statement had nothing at all bullish in it, it was actually quite a bland statement, in any case as the DOW is tickling all time highs, the Russell 2000 (the index that leads the market) had its worst month as we close out April since May of 2012. If this doesn’t tell you something, as for sector performance, Utilities WAY outperformed every other S&P Industry group, Utilities, the defensive industry. A distant second were Energy and Healthcare. So, as to that “Knee-jerk” warning, I’d think we might take that pretty seriously.
Also as mentioned in the EOD Thoughts posted near the EOD, there’s also an issue of what appears to be two shorter duration trends that are short enough that in some timeframes they are mixing with one and another. This (really the charts themselves) are why I want to be VERY careful, especially today.
As for charts and indications… There are several assets I want to delve in to a bit deeper, one is GLD and GDX, this was an earlier read or probability I feel is a pretty reasonable probability regarding GDX which I like a lot, but at the right spot.
The EOD or post F_O_M_C action in GLD, Gold and GDX (gold miners) , in relation to an earlier GDX/NUGT long trade set-up, GDX / NUGT / DUST Update , was potentially significant.
As for the action in GLD…
Considering what happened in GLD right before the F_O_M_C and right at and after it, as well as the correlation with GDX, it could have just enough impact to set up the GDX/NUGT long trade entry that I wrote about earlier today as being a high probability… GDX / NUGT / DUST Update
Here’s the reaction in NUGT right at and after the F_O_M_C…
This 1 min intraday chart is VERY similar to the GLD reaction and you may recall what was bothering me yesterday regarding confirmation between GDX, NUGT and DUST…GDX / NUGT / DUST Update
In the context of what was bothering me about the rectangle range and market psychology/head fakes with very obvious price patterns that technical traders watch, here’s the chart that sums it up, but this also provides a great opportunity for the trade to come to us and the initial reaction in both GLD and NUGT lean toward that probability.
Make sure you have your alerts set for a move under $23.84 for GDX, that’s where the high probability trade that comes to us would have to break under first and then be confirmed, offering a great entry at very low risk.
As for the longer trend trade in GLD and the recent base GLD Target Revision , a VERY high probability position would be set up with a move just a little lower, although this is somewhat myopic when considering the bigger picture, it would allow for great call set ups and better timing without opportunity cost, again, the trade would be coming to us.
This is the GLD daily with the base revision, the target alert would be < $122.84 for the best entry (trade coming to us).
I have VERY little doubt the GLD trend trade is going to work, however today there was simply too much noise among different timeframes and considering the market’s psychological concepts, I’d rather miss the trade than enter at an area in which we are right on the trade and wrong on the timing.
GLD’s 4 hour…
Essentially the same short term (last 6-days) range concept that applies to GDX, applies to GLD, however the 4 hour chart is way beyond any near term concerns and is very strong as seen above, still the right entry in GLD would be much more advantageous and I simply couldn’t enter today on some mixed timeframes, some of which I suspect are likely representative of the head fake move that sets up the “Come to us” trade as well as great call/option positioning.
As for another favorite right now, yesterday I closed the FXI calls for a 53.6% gain for a 2.5 day trade while leaving the FXI equity long in place: I Am Going to Take FXI May $34 Calls Off the Table (Tuesday April 24th 9:53 a.m.) and FXI Follow Up.
That was the right call for the options trade as the 3C signals suggesting we should book the gains were right on as FXI pulled back in to the gap today.
This is where we closed the FXI calls (2.5 day trade) for 50+% and the pullback today that would have eaten those gains, but the FXI long was left in lace as I think we have more upside to go. I wouldn’t have entered a new call position today in any case without a stop run or something else to lower the premium and set up a nice options entry, but the reason the equity long was opened and held was to take advantage of a longer duration trade without having to trade around a simple pullback.
FXI’s 5 min with yesterday’s negative near intraday highs where we closed the calls and today’s positive divegrence shows FXI is working on a high probability continued upside move, but recall, FXI was only entered because FXP (the trade I like even better for the longer term, was flashing pullback signals significant enough to trade around.
At #1 FXP starts a Channel Buster, at #2 we enter FXP long (equity) and at #3 we swap out the FXP long for an FXI long last Friday… Closed FXP trading position long, opened regular size FXI trading position long & FXI Calls
This is the 60 min FXP chart, although we aren’t in it right now, the leading positive divegrence as well as the Channel Buster suggests we will be back in FXP long (our short China play) in the not too distant future.
As for the Futures after market, there’s some interesting action going on…I noticed them as I was working on this post and posted them around 6:15, Futures Update
This is about when the market transitioned from a healthy NYSE TICK not too long after the F_O_M_C to a not too healthy TICK this afternoon.
The earlier part of the day , pre F_O_M_C was very dull all over, you can see why in the NYSE TICK Index as it was in a range of about +/- 500 which is extremely thin.
Right after the F_O_M_C we saw a -1300 reading which is extreme and then a trend with price as it should that hit +1500 which is also extreme, then the chanel broke, this is where there’s a breadth problem.
Speaking of breadth, I’ve had some questions about momentum stocks getting hit lately, these are breadth indicators.
This is the percentage of all NYSE stocks trading above their 40-day moving average vs the SPX in red, you can see them falling off and out of bed with the SPX (think HYG lever) which I showed earlier today… HYG Update
The NYSE stocks trading One Standard Deviation Above their 40-day have also fallen off recently as well.
The real momentum stocks trading 2 Standard Deviations above their 40-day have also taken a beating.
In Leading Indicators, HYG was pretty much flat all day until the market got a helping hand from lever #1, it popped around 3:25 p.m., not too far from the time the NYSE TICK gave out.
As far as credit vs. the market on a larger scale, not pretty.
And right there at the April mini cycle…
Sentiment gave out a bit toward the EOd, not worth the chart capture though.
While VXX (one of the 3 arbitrage assets including HYG and TLT) was doing its own thing that I think is quite different than what price looks like as I posted several times today…VXX (Short Term VIX Futures) Update and almost added to, the flight to safety trade, TLT was outperforming its SPX correlation.
TLT (blue) vs the inverted SPX to show the natural correlation is way outperforming the correlation is what looks like a flight to safety move.
As a result, one of my favorite Leading Indicators, Yields which tend to drag equity prices to them, were severely dislocated today.
After having seen this chart, I felt a lot better about the VXX weekly calls expiring Friday as well as the May monthlies.
Commodities also gave out today.
Think gold and perhaps Crude.
In essence, I see pretty good probabilities at least for the first short duration trend (pullback), whether there’s accumulation or not we’ll have to see and several charts, especially in the NDX look pretty bad, for instance…
QQQ 3 min
QQQ 5 min
QQQ 10 min
Not pretty charts. However there are several assets we’ve been concentrating on that do look like they’ll give us some good entries (GLD, GDX, NUGT, VXX, perhaps several assets like NFLX, a trade in AAPL, GOOD and several others mentioned the last 2 days).
Beyond all of that, I’m going to keep an eye on futures tonight, they continue to not look so hot in after hours, you saw the earlier post, here’s an updated view…
ES 1 min, note action after 4 p.m. (16:00)
NQ 1 min
TF 1 min
Although I think the transition on the 1 min charts is interesting, I usually don’t trust these much overnight, however there’s some obvious migration to 5 min charts.
ES 5 min, Again note action after the close
NQ 5 min
Meanwhile EUR/USD has been nearly perfectly flat since 11 a.m. and you saw the single currency Euro and $USDX futures…
We’ll see if the night brings anything else interesting, if there’s migration to 5 min charts already, I suspect there may be.
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