The problems with old pillars of the market is they gradually crumble, most especially when the primary props are progressively withdrawn, weakening the pillars ‘as if’ they were salt. The churning of markets seems biblical relative to a majority of distribution patterns (all year long); with perhaps the outcome also of a biblical recollection (like the pillars of Sodom & Gemorah?). At least Thursday seemed pretty ominous as a ‘cycle ending warning’, though the cycle ended much earlier this year. Not just with equity market performance as the projected distribution (under-cover of buybacks and so on) commenced, but also as ‘monetary policy’ telegraphed the FOMC’s intentions by ‘tapering’, then trying to postpone getting out of their self-induced corner with minimal volatility disruptions to markets.
I mentioned Wednesday that Chair Yellen had to do this before a new political year; that we thought they would even though it wasn’t economically justified, and that next year sees several ‘hawkish’ new voting members on the Board; a further reason for the FOMC to proceed. In the last couple sessions I called for a rally because too many shorts could be trapped, as well as believing the ‘option writers’ wanted the S&P to stay within the 2000-2100 range through the Expiration, so the rumored huge out-of-the-money lower-strike price Put buyers (especially) would not be able to ‘Put anything to the writers’. That worked too. Last night I also said we might go short as soon as Thursday morning again; a further reason I was so pleased that shorts got run-in Wednesday helping set it all up. I am amazed it worked out this well, without the market going back to a fully overbought condition. Now I suspect you won’t see that, as prospects from a technical analysis basis (not even considering the wrong-headed Fed spin on ‘why’ they moved, which they needed to do; but it’s not so calm in recovery as they claimed. Nor is it early in the recovery as Chair Yellen said; but rather late to be candid). Prospects are definitely technically damaged by Thursday.
Thursday was an S&P ‘outside-down’ session, technically. That’s a higher high, a lower low; and lower close. It’s the end of Expiration so not to overemphasize it, but we saw the feeble follow-through and knew how currencies were responding. Of course, an immediate flattening of the yield curve, and the opening long on the first dip for a gain, but primarily as stated to position for a new short. There is great significance to these pillars the bulls rationalized as crumbling. As a Fed struggles to unwind its Balance Sheet there are big issues. Also Natural Gas made new ‘inflation adjusted’ lows; putting pressure on investment units of various structures in the Energy area. Today was a reminder that the dynamics of this market remain ‘range-bound distribution’ that I’ve outlined all this year.
Oil and credit are dragging the markets around; with a Fed intervention toward the last possible moment, rather than proactively earlier. They claim proactive or earlier action, but that’s ridiculous given the data-points they proclaim as key. The Fed’s decision was based on being backed-into a corner, which is why I’d said either way they move would be welcome; either viewed as a mistake (if they did nothing, or what they did, presented as dovish but when we looked at the Reverse Repo today it was clear that liquidity remains pretty low). So let’s assume the decision was an unavoidable policy mistake. The Fed tried to talk-down the Dollar; a total failure as the Greenback surges as we expected.
