Is This The Beginning Of The End Of The Ponzi Scheme?

Tyler Durden's picture

Submitted by Nic Lenoir of ICAP

Risky assets are not having a very good day. In fact it's their worst day since March. Not losing 130 points on the Dow Jones is anything to write your relatives about, but there is definitively a combination of developments in the markets today that are worth noting.

The S&P 500 future has broken the overlap around 1,037/38 and is now well established below the trendline joining the lows. After attempting to retest the 1.6165 break out of the H&S neckline 2 days ago at 1.6125 and failing, GBPUSD is back down below 1.60. The Nikkei, after a failing to breakout higher out the wedge around the tops and also failing to fill the gap left open in October, is plunging quite abruptly. The Nasdaq future fell short of challenging the overlap with the lows of July 2008 at 1762, and came back to test 1670 this morning. This last level is quite pivotal, and we would use that as a good guidance for further acceleration lower or conversely a hold could mean we reached downside potential. Personally I remain convinced that medium term we are going a lot lower in equities, a break of 1670 would only make my view nearer term than I originally thought.

I saved the best for last: the LQD ETF which is basically a proxy for investment grade bonds which has been on a straight ramp up since October 08 seems to have broken its trend. Tha comes on the back of some observations over the last few weeks of some divergence between the CDS market which has made attempts to move wider while equities kept grinding up. This is by far the most important development. If the price action in the next 2/3 days confirms this break, then really it means the carry trade as a whole is starting to break down. It's one thing to have an equity correction, but with CIT possibly headed for bankruptcy, Saturn shut down, Ken Lewis resigning, regional banks closing faster than schools due to swine flue, and commercial real estate looming, there is enough smoke in credit space to reignite some fire. A lot of fast money moved into credit because it outperformed stocks even after a 60% rally, and that's a problem too if things deteriorate. People view leverage through short selling as evil because it is unpatriotic to bet on the market going down, but propping up the market through leverage beyond sustainable levels is just as good a catalyst for a sell-off... actually it's a better catalyst because it brings about people shorting based on valuation that would not get invlved otherwise.

Crude oil is attempting to defy gravity and fundamentals today. Interestingly natural gas is taking one on the chin, which is perfectly warranted given the level of inventories recorded. There is a story that has not made much noise on CNBC and in the news, but in my opinion sheds very insightful light on the commodity space. The Chinese government has announced they would not invest in aluminium for the next 3 years, nor would they develop any further production capacity, or build any shipyards. There are thousands of idle cargo ships around the globe, and chinese factories work at 60% capacity (that we know of, would not be unreasonable to assume it is in fact worst). Not being a nobel price in Economics, I would still have to think it's a fair bet that commodities could be under pressure here, especially if financially leveraged accounts stop propping the market and need to reverse engines.

So looking around asset classes there are clouds forming here. Keep an eye on credit and the LQD to see if the cracks are sign of a clean break. Fundamentals could well offset the pro-cyclical arguments... and then some.

Good luck trading,



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Cognitive Dissonance's picture

The stars are aligning for a potential "Look out below" moment.

ZerOhead's picture

My bet is still firmly on "Pigs Having Wings"... for the time being.

That said... "Look out below!" still has merit.

TumblingDice's picture

Funny, but today was the first day I've thought about hedging my bearish bets. It seems like a lay-up to me...

SPX is coming up against its March-July trendline. Rates are low enough. Oil is still in a comfortable range. Nasdaq, XLF, an SOXX are coming up on support. I don't usually hedge but I'll make an exeption tomorrow probably. Selling some Oct puts or buying puts on some ultrashorts would do the trick.

molecool's picture

I reported on the LQD this morning Tyler - might at least give me a hat tip. Which is what I do when I mention any of your charts on ES. Maybe it's coincidence - in which case you are forgiven ;-)

orca's picture

Don't get over-excited just yet, they will try and try and try again, especially around SP 1030. Having said that, just let them tire themselves, short high within callspreads, and the moment it gaps away (and it will) through 1030 close the long call. Perfect setup for this Air Supply loving multi-day trader in this sticky tape. Actually, I hope they will up it once more, just for the heck of it. They want tp go up, they have to buy, so it is their problem, don't make it yours.

Anonymous's picture

I wonder when everyone is heading for the exits at the same time, the short haters will wish for their return when no one shows up to buy back and support the price on the way down. Without them, who is going to buy this stuff?

Sancho Ponzi's picture

Or is it a head fake before next week's treasury auction?

SilverIsKing's picture

Just my opinion but I think this is a shake to strengthen the dollar ahead of T sales next week.  No reason to think the green shoots are turning brown just yet.  At some point they will but it looks like the old, "drop stock, prop dollar" trick.  One of the oldest in the book and one I've often fallen for.

Anonymous's picture

It might be a head fake to prop up treasuries, but that's a counterveiling play. You also have to think about the longer term picture and their desire to raise the debt ceiling, which would entail a prolonged decline in the market, enough to scare politicians into signing onto stimulus V 2.0.

My guess is this will be the 5-10% correction we've been waiting on for months... and then you can say hello to a higher debt ceiling. If congress is busy scrambling to pass legislation to "revive" the economy, they're probably not as concerned with auditing the fed... (we don't learn from experience).

SilverIsKing's picture

You may very well be right.  If either or both apply, then it is highly likely that the market is down a lot tomorrow to give everyone the weekend to think about things.

lieutenantjohnchard's picture

i've been scratching my head today regarding oil, too. it seems to have a bid underneath it. can't find any news. maybe a middle east situation is developing and the powers that be know something? i didn't see anything particularly bullish on yesterday's petroleum data.

Anonymous's picture

How about the silence from Israel on Iran's newest disclosure

lieutenantjohnchard's picture

"How about the silence from Israel on Iran's newest disclosure" that's a good point."

I closed most of my oil positions yesterday. But with equities getting crushed and the dollar up one wonders whether something is up with oil.

Gilgamesh's picture

How much of a risk premium is Iran worth now?  No one can say, but what would people guess is the downside to oil short term with zero world tension - 30?  And the upside on a blockade by Iran due to war - 400? 800?

Sancho Ponzi's picture

The demand for natural gas is so low that unless we have a cold winter, inventories will exhaust storage, and the ng companies will literally have to shut down production, yet they dare not cut back production in the event storage capacity is exhausted. 

Anonymous's picture

Well you can't say that everyone heard it here first, but maybe at least I can you *you* heard it here first...

Winter is going to be not just cold, but in fact "fucking cold".

geminiRX's picture

We may finally get to hit these stupid cramerized bulls with a shovel! This is better than anything on TV:)

Anonymous's picture

I see the giant sucking squid pattern, the most feared by HFT traders, developing in those charts.

100PercentProle's picture

It's all good.  S&P 500 to 1100 by end of next week.  DXY on the other hand...’s-october-1-sp-down-20-pts-you’r...


Whatta's picture

"with CIT possibly headed for bankruptcy, Saturn shut down, Ken Lewis resigning, regional banks closing faster than schools due to swine flue, and commercial real estate looming, there is enough smoke in credit space to reignite some fire"


I thought the above were green shoots? No?

GS etal can make money going back down too. Look for downward revisions for a while until we get to some choke-point...where we all feel wealth imperiled again, and then flip the switch on the Hal9000 to "Up" again and go long. Simple game, really.

Happy Oktoberfest


Anonymous's picture

I wish I could live inside that photo

Anonymous's picture

I wish I could live inside that photo

Anonymous's picture

Proofread these posts please; some are quite painful to read. Nobel Price?

Hephasteus's picture

You're the person torturers pick last aren't you?

rhinotrader's picture

Not very good volume for a down move. I am short, but tired of "waiting for Godot" with this market.

Anonymous's picture

Re LQD -
LQD is trading ex-div which explains the drop

Ducky's picture

It should only drop by the amount of the dividend. It dropped over 3 times as much

Gilgamesh's picture

LQD has been the talk the last couple of days.  Volume picked up on a little down move, and then wham! today - 20EMA/trendline (virtually the same thing) busted on a big volume spike.

Ned Zeppelin's picture

When the time comes, rest assured GS will be running the lifeboat concession, granted by the United States Treasury on an exclusive basis, so as to avoid "systemic risk."  

cocoablini's picture

I think crude is getting heatmapped and propped up. There are a lot of longs in that market. It's also due for a small technical rebound before heading back down. It's been getting pummelled for weeks

donatoloscalzo's picture

excellent analysis as always, bravo nic!!

Daedal's picture

"Is This The Beginning Of The End Of The Ponzi Scheme?"


Anonymous's picture


Oh Dear God, you know how badly I miss the good old days when the market would crater 200 points in the last half and hour. Please may I see that just one more time before I pass from this ball of dirt...

Oso's picture

JPM sld $500mm notional in S&P bigs  with more than half coming in last hr of trading.


prop or facilitation...? you be the judge.

Anonymous's picture

Well, it is October. And this officially marks that start of "crash season".

Being long here could be hazardous to your health...

Bam_Man's picture

"Is This The Beginning Of The End Of The Ponzi Scheme?"

Which one?

There are so many running concurrently that I have lost count.

PBS's picture

What happened this week?  Was there a major, unreported outbreak of swine flu that kept the good folks at 85 Broad out of the office?

quant-this's picture

When a 2 Day RSI of the close reaches below 10, the market closes up 2 days later 55% of the time with a 1.08 win to loss ratio even when accounting for commissions and frictional trading costs (slippage). Unless the surprise is awful tomorrow in terms of unemployment (and the computers look at expectation not the actual number), then there is a good chance that when the HFT interface indicates that the market is oversold on an intra day basis, look for the longer term (2-5 day) systems to go into buy mode.

Ducky's picture

My LQD's got called away last night! Ouch for caller! It dropped a bit more than the dividend.

Miles Kendig's picture

It's one thing to have an equity correction, but with CIT possibly headed for bankruptcy, Saturn shut down, Ken Lewis resigning, regional banks closing faster than schools due to swine flue, and commercial real estate looming, there is enough smoke in credit space to reignite some fire.

Classic bit.  Concur. Combustible material, check.  O2, check.  Ignition source, check.  I know someone will plug in a movie set fan and turn it on high any time now.