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Play That Funky Music

Guy AdamiIt’s NFP day and it’s Friday. Projections hit or miss and it doesn’t really matter. Our stock market has been pre-ordained to always rise on NFP day and so it seems. 15 of the last 16 NFP days have been up after all. This week there has been a lot of discussions on market ‘rigging’ by HFTs and algos. I caught a clip of Guy Adami of Fast Money fame where he stated that the market was not pre-determined and HFTs can’t control the market. Knowing his stance on the Fed I tried to clarify his comment via twitter and he crystalized the issue. If people are concerned about ‘rigging’ it really is the unaudited Fed that remains the central theme to it all.

Not for a second do I believe that the timing and language of Yellen’s comments on Monday’s quarter end was a coincidence. There are no coincidences. If you are in a poker tournament and your opponent gets 4 aces you say nice hand, if he gets 4 aces again on the next hand you go ‘wow, what a lucky guy’. By the third time you get very suspicious and I suspect the conversation takes on a different turn by the 8th hand in a row of nothing but 4 aces. The daily gap ups are starting to evoke similar emotions as we are approaching the 8th day in a row of gap ups.

Bulls like to state ‘well it’s a bull market’. True, but that’s pablum that offers no explanation. What I would like to see is an explanation that is commensurate with the facts on the ground. And the facts are there is consistent selling going on despite overnight price levitation amongst heavy divergences that do not look bullish at all. In fact, looking at the volume charts of $QQQ and $IWM below does this look anything like bullish markets at record highs? I humbly submit, no:

QQQ volume IWM volume

Yes, $SPY merrily keeps cranking higher on ever lower volume with 3 gaps remaining unfilled:

SPY volume

But all this can’t hide what I suspect to be the underlying truth of it all: $IWM and $QQQ have benefited the most from QE as the excess liquidity has found its way into the most speculative of assets. Well guess what? The liquidity is slowly coming out and it’s starting to show up in form of selling. Yellen knows this of course. Bernanke had made is amply clear that asset inflation was a primary goal of the Fed. Yellen is simply continuing the tradition of sweet talking the market. And it looks as if someone has had enough. One of the only Fed governors concerned with financial consequences of the Fed’s policies suddenly quit yesterday:

Stein Resignation

Fed governors usually don’t just resign. I can only speculate of course, but I can certainly see where he wanted no longer to be part of a policy that he views as concerning to put it mildly. Better quit the mob before the place gets raided 😉

So here’s the set-up then: We are pushing against the upper Bollinger Band having jumped from the lower band in a straight fashion from the lower band with no pause while GDP forecasts were reduced yet again by another 0.3% and various economic reports missed again. Next week we have earnings season commence in earnest, so who wants to go long here knowing that the 31st candle is actual wrong and we never had gap fill there either? Today marks the 5th day of 5EMA disconnect. The risk reward simply points toward an imminent re-connect. Now once that happens one can reassess and possibly play long, but for now I view it as a high risk proposition:

SPY

My view remains that we are setting up for one heck of a sell opportunity. As I wrote futures are again setting up for a gap up. I don’t know what the number will bring but consensus is that markets will jump on a beat because the economy would show signs of strength and markets would jump on a miss because of the Yellen put. Yes, this qualifies as analysis these days, guaranteed asset inflation. I don’t buy it for a minute especially given the action outlined above.

As I took some profits yesterday I look to re-establish some positions on any spike and/or expand on existing positions. In January the initial spike reaction to the NFP number gave way to a quick and deep pullback after about a week of consolidating. Maybe this time the reaction will be swifter. Either way, it is NFP day and this means it’s time to play that funky music:

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Categories: Daily Market Brief, Market Analysis

3 replies

  1. Jeremy Stein’s departure from the FRB is certainly a loss, but there’s nothing mysterious about his timing.

    He is returning to his tenured academic post at Harvard, which has a firm 2-year leave limit.

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