Russell 2000

After last night's tumble in copper and surge in CNY during Asia, Europe steadied the ship with more plunging yields (especially the front-end) but the US was all about USDJPY ignition at the open to blast the S&P through 1,950 comfortably and decouple stocks once again from reality. VIX was higher and credit markets were not as exuberant and by the time Europe closed and POMO was done, stocks crumbled back to unchish (apart from the Russell - lifted by another epic short squeeze from the Biotech sector this time). This is the best 4-day swing in the Russell 2000 since Jan 2013 (led by Biotechs today) Gold, silver, and copper ended almost unch as Oil surged 1.7% to over $104 (biggest day in 2 months). Treasury yields bear flattened (5Y +4bps, 30Y +1bps). The USD rose 0.3% - its best day in a month - as EUR closed at 4-month lows.

The great mystery of the endlessly levitating market continues to confound everyone, even Goldman Sachs. Because while the market soared in May (and has continue to surge in June) contrary to the sell in May mantra, when peeking beneath the market's covers, Goldman has found that most investor groups did just as they are supposed to do for this time of the year: they sold!

Risk is no longer priced into anything. Volatility has gone to sleep. Uniformity of thought has taken over the stock market. Complacency has reached a point where even central banks have begun to worry about it: the idea that markets can only go up – once entrenched, which it is – leads to financial instability because no one is prepared when that theory suddenly snaps. But all this bullishness, this complacency is only skin deep. Beneath the layer of the largest stocks, volatility has taken over ruthlessly, the market is in turmoil, people are dumping stocks wholesale, and dreams and hopes are drowning in red ink.

The US Dollar, gold, and oil closed the week unchanged... Treasury yields rose 6-8bps on the week... and the Russell 2000 had its best week in 2014... Sure, why not? VIX was crushed back to a 10-handle as managers lifted hedges and the Tepper-induced short-squeeze from yesterday followed through (+2.5% against a 1% rise in the S&P). The Dow and S&P 500 both closed at record highs (notably rich to the Fed balance sheet). Volume was 20% below average (and that was a payrolls day!). Copper tumbled over 2% - its worst week in 3 months as China's warehouse probe continues.  VIX closed at its lowest close since Feb 2007 (and once again the strange shadowy figure of massive after-0hours volume spikes in VXX appeared).

We recently noted that the average Russell 2000 stock is down over 22% and the majority of the broad equity market is well into correction territory as the rally is supported by fewer and fewer names (cough AAPL cough). However, as FBN's JC O'Hara notes, looking at the percent of stocks above their 200 day moving average in the S&P 500 vs the percent of stocks above their 200 day moving average for the Russell 2000, we find the spread is at its widest point in the history of our database. While we find breadth is not a proper market timing tool, a heightened reading often forewarned of troubles ahead. It was more common to alleviate a wide spread by the S&P pulling back to the Russell rather than the Russell playing catch up.

For many months we have discussed the massive outperformance that buying the "most shorted" stocks has created. The 'alpha' generated fro buying the weakest balance sheet companies in preference of the stronger has enabled the dash-for-trash strategy (just as we saw yesterday when Tepper unleashed hell) to be the new meme. And so it is, like anything that is popular, ETFTrends reports that ETFis - a turnkey ETF provider - has filed with the SEC to launch an actively managed short squeeze fund...

The initial exuberance over Draghi's actions (and promises) faded quickly with Treasury yields falling and the EUR surging back higher (to close at 10-day highs)... but thanks to sterling work by AUDJPY and some well chosen 'I'm not scared anymore' comments from David Tepper, US equities soared in a world of their own (as VIX dropped). Volume was also heavy (but the siz came on the downswing after the initial jerk higher from the ECB). The Russell 2000 soared ~2% (best day in 3 months), Treasury yields closed lower, the USD closed lower (as EUR surged) and unchanged on the week, and gold and silver jumped. VIX also helped to support stocks at it dropped modestly (but remains notably disconnected from the equity exuberance). NFP tomorrow... time to sell vol for sure!!

It's Tuesday - so bonds are red, idiot. Trannies (-0.9%), rather unusually, underperformed and on the back of yesterday's Russell 2000 weakness suggests beta-chasing muppets are less engaged. After yesterday's USDJPY recoupling, Treasury yields pushed higher once again and almost recoupled with stocks strength from last week. 10Y yields are up 12bps in the last 2 days - the worst 2 days in almost 7 months. The USD leaked modestly lower led by EUR strength. Copper gave back all its gains from the weekend's exuberant China PMI and oil, gold, and silver flatlined. VIX remains total decoupled from this last few days' exuberance. Volume was average - fed by the early plunge but faded rapidly as we levitated.  With regard to the red close for stocks on a Tuesday: it is rumored that a wrong seasonal adjustment factor was applied to today: it was really a Wednesday.

It’s hard to "fully commit" to this rally given "corroded internals," warns FBN Securities technical analyst JC O’Hara in note. As we previously noted, new highs are extremely negatively divergent from the index strength, as are smarket money flows, but what has O'Hara "very disturbed" is the fact that the average Russell 2000 stock is over 22% below its 52-week highs. As O'Hara notes, investors are ignoring "technical signals that have historically forewarned" of a drop; they’re "jumping onto a plane where only one of the two engines is working. The plane does not necessarily have to crash but the risk of an accident is much higher when the plane is not firing on all cylinders."

Broad US equity markets stumbled out of the gate this morning but it's Tuesday so the BTFT traders rescued it. However, when news of 2 downed helicopters in Ukraine hit, stocks tumbled once again with Russell 2000 (small caps) and Dow Transports (the highest hig beta recently) getting slammed... USDJPy ramp efforts continue to save us from terrible Tuesday. Bonds and FX are not reacting so far...

PMI beat, ISM missed (after all fabrications), and construction spending missed big... so sell bonds and buy stocks!! Today saw Treasury yields spike 5-7bps (10Y's biggest 1-day move in over 6 weeks). Stocks were mixed with Trannies surging once again to record-er highs (+0.5%) and Russell (-0.5%) along with Nasdaq modestly red (S&P and Dow also record highs). Of course all the excitement of the day was the post-ISM reaction and re-reaction (which saw the Russell lose 1.2% at its worst). The USD rose 0.3% (best day in a month) to 4-month highs. Gold, silver, and oil all fell 0.4% or so (reflecting USD strength) as Copper surged 1.4% (presumably after China's PMI over the weekend). VIX was higher and notably divergent from stocks once again...

Dow Transports were the best performing US equity index in May, rising 5.5% - the best May in 23 years (and best month since Oct 2013). The Dow and Russell 2000 also managed to scrape out gains for May. May also saw bond-buying (the best month since Jan) and gold-selling (worst month since Dec). Treasuries flattened for the 3rd month in a row as 2s30s dropped to 1 year lows. On the week, stocks soared (as "most shorted" were squeezed to death - best 2-weeks in 2014) but VIX has its best week in the last 5, bond yields tumbled and the curve flattened (10Y -8bps, 2Y +2.5bps), gold and silver were clubbed (down 3-4%) for the worst week in 8 months. Amid all this angst the USD ended unch. The S&P overtook gold YTD today but bonds remain 2014's best performer.

If clichés reflect overly common (if therefore unappreciated) wisdom, then we finally have a good explanation for why risk assets continue to rally.  No, there are actually not “More buyers than sellers” – money flows are negative over the last month for both U.S. equity mutual funds and ETFs.  And forget about investors “Downgrading on valuation” as stocks climb higher and higher; truth be told, that’s not even really a thing (unless you work on the sell side).  Nope, this is a “Flight to quality”, “don’t fight the Fed”, “never short a dull market” environment with “easy comps” from a long rough winter.  Want to call a top somewhere around here?  Remember that “Markets discount events 6 months in the future.”  A “Santa Claus rally” in June?  That would fit the one cliché we know is actually the market’s True North: it will do exactly what hurts the most “Smart” investors.  And that would be to rally further as the doomsayers double down and the timid cling to their bonds and cash. 

It has gotten beyond ridiculous: a few short hours ago the yield on the 10 Year bond tumbled to a fresh low of 2.49% (and currently just off the lows at 2.50%), wiping out all of yesterday's "jump" on better than expected Durables and leading to renewed concerns about the terminal rate, deflation and how slow the US economy will truly grow. Amusingly, this happened just as US equity futures printed overnight highs. Doubly amusing: this also happened roughly at the same time as Spanish 10 Year yields dropped to a record low of 2.827%, or about 30 bps wider than the US (moments after Spain announced that loan creation in the country has once again resumed its downward trajectory and a tumble in retail deposits to levels not seen since 2008). Triply amusing: this also happened just about when Germany had yet another technically uncovered 30 Year Bund issuance, aka failed auction. So yes: nothing makes sense anymore which is precisely what one would expect in broken, rigged and centrally-planned markets (incidentally those scrambling to explain with events in bond world where one appears to buy bonds to hedge long equity exposure, are directed to the minute of the Japanese GPIF pension fund which announced it would buy junk-rated bonds to boost returns - good luck to Japanese pensioners).