Price Action

The markets are all about timing. In this case, 55 weeks.

Hate to say it but I think stocks can keep going up...

It will come as no surprise to any ZeroHedge readers but High Frequency Trading (HFT) deeply concerns Erik Hunsader, founder of Nanex. He worries that today's investors, our regulators, -- heck, even the HFT algorithms themselves -- don't fully understand the risks market prices face in the brave new era of bot-dominated trading. For instance, Hunsader estimates that HFT algorithms are responsible for 70%(!) of all completed transactions on our exchanges, and for 99.9%(!!!) of all exchange quotes. The pictures of trading floors you see on TV, where the people in bright jackets appear frantically busy in making their trades, have no bearing -- claims Hunsader -- on the actual trading action. The real action happens across fiber-optic cables, on racks of servers in cooled rooms; where an arms race defined by cable length and switching speeds is being waged. The reality is that the machines have taken over.

The "mañana" approach to fiscal management, that Spain is known for, presented what is generally perceived as overly optimistic growth forecasts for 2013 and lacked details on structural reform resulted in another risk off session. As a result, Spanish stocks continued to underperform (IBEX seen lower by over 5% on the week), with 10y bond yield spread wider by around 12bps as market participants adjusted to higher risk premia. The state is due to sell 2s and 5s next week, which may also have contributed to higher yields. As a reminder, Moody’s review on Spain is set to end today, however there is a chance that the ratings agency may extend the review for another couple of months or wait until the stress test results are published to make an announcement. In other news, according to sources, Greece could return to its European partners for a Spanish-style rescue of its banking sector, as the country is looking to ease the burden via another writedown of its debts or a strong recapitalisation of its banks (no official response as yet). Going forward, the second half of the session sees the release of the latest PCE data, as well as the Chicago PMI report for the month of September.

Yes, it did feel kinda rainy already yesterday with “Purple Rain”.

Total Risk Off close today.

Bad Rain. Bad, Bad Rain...

There has been a lot of ink spilled about how the stock market performs during Presidential election years generally leaning to why investors should be fully invested to the hilt.  The current election year, with just three months remaining, has certainly played out to historical norms with the markets advancing on expectations of continued government interventions even as economic and fundamentals deteriorate.  To wit Bespoke Investment Group wrote back in July: "We have highlighted the similarities between this year and prior Presidential Election years numerous times. Most recently, in early July we noted the fact that based on the historical pattern, the S&P 500 could see a modest pullback in mid-July coinciding with the kick-off of earnings season. Sure enough, the market saw some choppiness about a week and a half ago and subsequently rebounded in the middle of last week. Holding to the historical pattern, that rebound came right at the same time that the market historically sees its summer low.  If the pattern continues, the S&P 500 could be set up for a nice rally to end the Summer. Will it hold? Only time will tell, but if the historical pattern has worked so far, what's to stop it from continuing?"

While Nomura's Bob Janjuah remains 100% correct in his diagnosis and prognosis of the current 'grossest misallocation and mispricing of capital in the history of mankind', his tactical short was stopped out last week. The modest loss on the position though provided clarity on the importance of the 1450 level for the S&P 500 and he remains confident that on a multi-month timeframe he expects 800 to be hit with only a muted 10% possible upside in global equities due to underlying growth, debt and policy-maker concerns. Critically, he suggests it is premature to go aggressively short risk at this precise moment, urges traders to stay nimble, and warns "...risk assets are in a bubble which of course can extend, but which can reverse sharply and suddenly. Up here, 'valuation metrics' are not going to help much... this bubble could extend for maybe a few months and by up to 10%, ...but that we could see global equity markets 10/15% lower in virtually a 'heartbeat'."

As we enter the North American cross over, equity indices in Europe are seen higher, supported by telecom and health care sectors. There was little in terms of fresh news flow and instead the price action was largely driven by expiration of various futures and option contracts. On that note, it is not only the quadruple witching day, but also quarterly S&P rebalancing. As such, brief spells of volatility will be observed as market participants close out remaining positions. Looking elsewhere, range bound price action was observed in the fixed income market, where the benchmark German Bund is currently trading in close proximity to 140.00 level. Talk of demand from Middle Eastern accounts in EUR/USD earlier in the session saw the pair trip buy stops above 1.3000 and then above 1.3025. GBP/USD was a direct beneficiary of USD weakness, which in turn pushed the pair above 1.6300 level (touted option barrier). Going forward, the second half of the session will see the release of the latest CPI from Canada.

We have seen consecutive weeks of bullish strength in the gold and silver markets. Gold has completed what is known as a ‘Golden Cross’ and silver is poised to complete one in the coming days. A ‘Golden Cross’ occurs when not only the current price, but also shorter-term moving averages such as the 50 day moving average “cross” or rise above the longer term 200 day moving average. Gold’s 50 day moving average (simple) has risen to $1,651/oz and is now comfortable above the 200 day moving average (simple) at $1,645/oz and accelerating higher. Silver’s 50 day moving average (simple) has risen to $29.86/oz and will soon challenge the 200 day moving average (simple) at $30.47/oz.

"The bottom line is simple: The Fed and the ECB are directing and attempting to orchestrate the grossest misallocation and mispricing of capital in the history of mankind. Their problem is that their actions have enormous unintended and even (eventually) intended consequences which serve to negate their actions in the shorter run, and which could create even bigger problems than we currently face in the near future. Kicking the can is not a viable policy for us now. The private sector knows all this, consciously and/or sub-consciously, which is why I feel these current policy settings are doomed to fail. Having said all that, the one area which for some reason still holds onto hope that Draghi and Bernanke can still perform feats of "magic" is the financial market, which central bankers assume, rely on and are happy to encourage Pavlovian responses. The reality here though is that even financial markets are, collectively, either sensing or assigning a half-life to the "positives" of central bank debasement policies, which to me means that even markets are only suggesting a short-term benefit from the latest policy actions. This is not what Draghi and Bernanke are hoping for, but in order for them to see the half-life outcome averted they know that we need to see major political and structural real economy reforms which somehow make Western workers competitive and hopeful again. The track record of the last four to five years inspires very little confidence that we will see such great necessary reformist strides taken anytime soon."

Volume was extremely weak on a run-rate basis during the middle of the session, picked up once we started the oil-driven algo-correction, then faded as AAPL dragged equities up to their VWAPs leaving the Dow Transports notably underperforming, NASDAAPL just in the green and small drops in the Dow and the S&P. Notably the S&P reached back down to the day-session closing price from FOMC-day and reversed all the way back to its VWAP at the close - the machines were well and truly in charge today! Treasury yields were lower on the day with the long-end outperforming and so real pullback as stocks surged. Oil dominated the price action of the day as correlation monkeys pulled and pushed around the pit close and contract roll with un-priced-in SPR rumors blamed by some. USD strength on the day saw commodities in general leaking lower. Markets had a very illiquid EKG-like feeling to them today - more so than most in recent times - with post-Europe-close activity in equity, volatility, and credit appearing to almost stop entirely. The Trannies closed today below pre-FOMC statement levels.

Stocks in Europe traded lower throughout the session, as market participants were seen booking profits following last weeks gains after the Fed announce a radical open ended QE program. Equity indices were led lower by the telecommunications, as well as utility related stocks. It is also worth noting that peripheral stock indices underperformed their core-EU counterparts, with some noting fast money and system accounts selling equities and instead turning to fixed income. As a result, Bunds have edged higher, with yields touching on highest level since April. Also, this week’s supply from France and Spain, as well as Germany, lead to modest spread widening. In the FX space, flows were light so far this session, as such both EUR/USD and GBP/USD are seen little changed as we enter the EU session. Going forward, there are no major economic releases scheduled for the second half of the session and volumes are expected to be thin given the Rosh Hashanah holiday.

Stocks in Europe traded lower throughout the session, as market participants reacted to another round of weak data from Asia. In particular, China’s imports fell 2.6% on the year in  August vs. Exp. 3.5%, underpinning the need for policy easing measures from the People's Bank Of China. Some of the weakness in equity space was also attributed to profit taking following last week’s gains. Spanish bonds continued to benefit from the ongoing speculation that the government will seek a full scale bailout. As a result, SP/GE 10y bond yield spread is tighter even though there is an outside chance that the constitutional court vote in Germany will delay this. On the other hand, IT/GE and NE/GE bond yield spreads are wider, reflective the upcoming issuance, as well as elections. EUR/USD and GBP/USD, both seen lower on the back of touted profit taking, as well as pre-positioning into near-term risk events mentioned above. Commodity linked currencies are also weaker, weighed on by the weaker data from China, which also showed that imports of crude oil hit a 22-month low. In terms of notable stocks news, Glencore said it will not improve its offer for Xstrata after the company raised offer for Xstrata to 3.05 from 2.8.

This morning, Germany attempted to sell €5 billion in 1.5% 10 Year bonds. It sold just €3.61 billion directly to investors (who had submitted a less than auction clearing €3.91 billion in bids), forcing the German Treasury to retain 27.8% of the auction, €1.39 billion: the highest retained amount since November 2011 when it was 39%. For one reason or another: the yield was too low at 1.42% (compared to the 1.634 average), there was much more supply elsewhere, fears of what the ECB will do tomorrow, or who knows - the real bid to cover was a paltry 0.79 (all in BTC 1.09 including government retention) compared to 1.57 at the last auction and a 1.31 average at the past 4 auctions. In other words the auction was for all technical reasons, a failure, and only the second such "failure" of 2012. The immediate reaction was Bund futures down 22 ticks at 143.28 vs 143.70 before auction as the market digested the surprising disappointment, with the German 10-year government bond yield up 2.4 basis points at 1.41 percent vs 1.37 percent before auction. In summary, if the Germans needed any more reasons that funding the insolvent Eurozone at all costs up to an including debt monetizations, which may result in failed bond auctions for German itself, are not in their best interest, they just got one. The good news: in an email sent out immediately by the German Finance agency, the bond sale was "not a risk to the budget." Wouldn't want a failed bond auction to jeopardize the budget now.

In continuing my rant on the Apple v. Samsung verdict, I wish to make clear once again that the vast majority of consumers of Google's and Apple's products are absolutely oblivious to the business model of Google, the business practices of Apple and the shadowy aggressive survival tactics of the behemoth that is Microsoft. If I am correct in this assertion then the potential ramifications of Apple actually defeating Samsung in the patent case decided last week is also lost on most.