Friday, May 28, 2010

Morning Update/ Market Thread 5/28

Good Morning,

Equity futures are flat following yesterday's 284 point jaunt. That was a ridiculous 97% up day by volume on the NYSE. Now, normally I would consider that a “panic” buying day, but it came on much lower volume. Remember, volume confirms price, and volume hasn’t confirmed any direction but down for the past 3 years.

And last night it dawned on me what’s occurring is not the same thing as what used to occur in the good old days of 90ish percent up or down days… Of course you know that the market is extremely volatile, but we’ve had SIX 90%+ down days in the past few weeks to go along with another couple 90%+ up days (no follow-through on the upside, only on the downside). These have not just been 90%, they’ve been in the high 90’s. Now combine that fact with the fact that four banks had perfect trading quarters… the conclusion is that HFT (High Frequency Trading) has become so good and so fast at chasing short term momentum that all the machines get on the same side of the trade way faster and more efficiently than they used to. I mean, come on – 97% of all the trading volume was long yesterday, that’s simply absurd. Was mom and pop going long because we finally broke back above 1,090? Hardly, these lopsided days are yet another sign of how HFT and a very few players have taken over the markets. I reiterate; the markets no longer exist, they are a computer simulation.

That’s not price discovery, that’s a game designed to print money for those who are in on it, and to steal money from those who are not. You know, an hour before the closing bell yesterday I had to run an errand that took me away until just after the close. As I was walking in the door I wondered to myself if we had managed to close over SPX 1,090 or not… then I thought to myself, you know I wouldn’t bet $5 on it one way or the other! Ah, ha! That’s it exactly, no I wouldn’t and I have NOTHING in the casino at the moment if you’re wondering what “bets” I’m playing.

Oh yeah, the last 5 minute bar rammed over 1,100. Which direction is the momo today? Are you willing to bet? My work says today will be down, let’s see if their computer simulation agrees.

By the way, the dollar is flat, bonds are up (hint to equities), oil and gold are both down slightly.

Hey, how about the way BP sat on the fact that the “top kill” was aborted early yesterday and was not reported for 16 hours? That was nice. The live footage of the leak looked like a mix of mud and oil, and it turned out that it was residual mud being flushed out by the oil. They say it’s still in progress, but to me it should be obvious when it’s working as the color should be consistent – it should be all mud. So we sit and we wait some more. Those who went long BP betting that this would work should be cautious, yesterday produced a shooting star candle and BP is opening well beneath it today:

Consumer spending came in below forecast this morning, flat for the month of April, .2% was expected. Personal Income grew .4% for the month, that is a positive, but without spending it shows that the consumer is “saving.” Of course saving may mean that they are paying down debt (or simply making interest payments on their credit cards):
Consumers are getting healthier-at least financially-as income gains continue. But the consumer paused growth in spending in April after strong gains the prior two months. Personal income posted a solid 0.4 percent increase for April, matching the gain the month before. The April figure came in slightly lower than the market forecast for a 0.5 percent boost. Importantly, the latest increase is in what really counts as the wages & salaries component advanced 0.4 percent after rising 0.3 percent in March.

But spending growth hit a speed bump in April. Overall, personal consumption was flat, following a 0.6 percent rise the prior month and 0.5 percent in February. The April number fell short of analysts' projection for a 0.2 percent increase. April was weakened by a drop in nondurables and was mostly price related.

Inflation is still almost nonexistent. The headline PCE price index was unchanged in April-easing from up 0.1 percent in March. The core rate also was soft, gaining only 0.1 percent and matching both March and the consensus forecast.

Year on year, personal income growth for April came in at 2.5 percent, slipping from 2.8 percent in March. Year-ago headline PCE inflation was unchanged at 2.0 percent. Year-ago core PCE inflation edged down to 1.2 percent from 1.3 percent in March.

The good news is that consumers are finding more greenbacks in their wallets and this should support additional spending and the recovery. April's PCEs number was mildly disappointing but not so much in light of how strong the prior to months were. The consumer on average is now pulling its weight in the recovery. And the Fed likes the inflation news.

Never met a statistic he didn’t like, LOL… and this is the best analysis I can offer. Oh, you can pay for analysis if you wish, but then it’ll be even worse and far more biased. Evidently he hasn’t seen the fact that M3 is down year over year making, “… more greenbacks in their wallets” a statement that simply is not true. M3 measures deposits in banks, and when it’s down, it means the supply of money is falling – that is debt is being paid down. That’s a good thing in the long run, but boy does it have a long way to go to resemble anything healthy.

Chicago PMI and Citizen Sentiment are released shortly after the open this morning.

Both the DOW and the S&P ran right up to their 200 day moving averages and stopped. The up move so far traced out a very clear a,b,c pattern and is probably complete. This pattern is most likely wave A of an A,B,C retrace of the entire move down since April – in other words, it’s likely a wave 2 retrace. Wave A is likely complete, and this move down should be wave B, then I expect wave C will take us up into that inverted H&S target of 1,140ish. If we fail to reach 1,140, that would be quite bearish. Regardless, once this wave 2 completes, wave 3 should follow. That’s going to be exciting, I hope you’re ready.

Admittedly, that count is just one possibility, but it is my highest probability and it is the count that McHugh is working as his top case scenario as well. Alternatively, it is possible that we fail to rise much further and descend from here. When I look at the daily chart there are three clear waves down and this could be a wave 4. If that's true, we should not climb much higher than here, and then we should have a 5th wave lower into new lows. Remember, EW doesn't tell you what's going to happen, it simply eliminates possibilities with its rules thus narrowing the possibilities:

Again, this is most likely a retrace of the entire move and that means it's probably a wave 2 correction. Shorting the top of wave 2’s is the most profitable trade in bear markets, it’s really the only bets of substance I’ll be placing in this casino until it begins to resemble a marketplace comprised of humans. Want to trade in these markets? Your competition are literally supercomputers, you are asking to be Superman…

The Kinks – Superman: