SPY

After 831.8K SPY puts were traded yesterday (vs 521K calls), today the trend of aggressive protection buying continues, as almost twice as many puts as calls has traded so far: 496K vs 272K. As the chart below shows, the top five SPY option classes traded today are all Puts, all of which have an October maturity, and strikes of 108, 114, 115, 116, and 112 in terms of popularity. With today's outright criminal market intervention, the surge in popularity of hedging the Fed's market making does not surprise us.

In a surprising, and at the same time completely expected reversal, all those who thought that Monday's always close due to mutual fund inflows were stunned to see a red close. Which should not be too surprising: after all there was no POMO today - period. The only days that now have a chance of closing in the red is when the Fed is not directly involved in greasing stocks through its open market operations. Which means tomorrow should most likely end green - Tuesday and Thursday are this week's POMOs: tomorrow the Fed will buyback TIPS maturing without maturity limitation, while Thursday will see the monetization of longer-dated bonds, due 2/15/2021 – 8/15/2040. Following these two actions, the Fed will next send Amazon, Netflix and Apple to fresh quintuple digit forward PEs on October 5 and 6.

The cold war is back... At least in terms of espionage. As expected, yesterday's stunning press release of the spy ring bust which came at a very tense time in US-Russia relations, and is already drawing a response from Russia. According to Reuters, "Such actions are baseless and improper," the [Russia] Foreign Ministry said in a statement. "We do not understand what
prompted the U.S. Justice Department to make a public statement in the
spirit of Cold War espionage. We deeply regret that all of this has happened
against the background of the relations reset declared by the U.S.
administration." Next steps - retaliation: "It's is a slap in the face to Barack Obama,"
said Anatoly Tsyganok, a political analyst at Moscow's Institute of
Political and Military Analysis. Russia will
inevitably follow Cold War etiquette and uncover an equal number of U.S.
spies, he said." All this is happening as Bill Clinton is in Moscow today, chatting with Vladimir Putin. We wonder just how reminiscent of Cold War propaganda those talks will end up being.

A sudden drop in the EUR takes stocks down. No immediate catalyst, and the Schapiro-Gensler cabal sure hasn't said anything to make the market nervous. Which means it is a charting astrology and technicals: the 200 DMA in the SPY has been breached, leading to a 5th consecutive onslaught at the DMA in the much more critical ES. Should this break, watch out below.

At today's rate of market melt up, we will hit Dow 36,000 in 332 days, or on March 12, 2011. This should occur a few days before Bernanke finally agrees to raise the discount rate to 0.50 bps. Also, at today's rate of price change, we will hit $715/bbl on the same day. We are confident that gas at $30/gallon will cause the Fed Chief Execution Officer to evaluate his conclusion that his brilliant monetary policy is not causing the single biggest asset bubble in US history. Last and not least, total US Federal debt on that day will be about $14.5 trillion, and when adding all the off-balance sheet items, should hit about $120 trillion. We have less than a year before total Alice In Wonderland oblivion. Oh, and since the latest episode of market melt up began, the SPY is trading as a 4x leveraged ETF on the XLF. Ignore that this statement makes no sense. Just buy. Buy everything. Then repo it to the Fed, they are particularly receptive to used single ply toilet paper, and then buy on repo margin. Insanity is here.

It seems like it was just a year ago when we noted the first instance of SPY becoming hard to borrow. Well, it was. To wit, from April 22, 2009:

Developing story: Traders
confirm several locations indicating SPDRs are no longer automatic
borrow and have made their way to the Hard To Borrow list: pre-borrow
call is needed versus automatic short prior, as not enough underlying inventory.

Have fun hedging the market when you can not short. Wholesale market squeeze is being orchestrated.

We just obtained confirmation that anyone who clears through Merrill Prime is getting a Hard To Borrow notification for the SPY once again. And so State Street and the BoNY guys come out guns blazing once again, to make sure it is impossible to short the market on today's Fed day. What is it with the market and HTB lists in April? At least market neutral funds are having a field day as they are forced to unwind in droves.

Because the best way to celebrate the all clear on the economy as presented by the "phenomenal" NFP data is to not participate in the guaranteed rally.

Across the pond, the FSA has just announced that it is launching a probe to focus on the front-running of block trades. Without doubt this is dictated by the recent bust including Moore's
block execution trader, who likely was involved in just this (note:
this is purely speculation absent further data). Images of Flash Trading, HFT, algos gone wild, and all sorts of other computerized frontrunning come to mind. When are the useless excuses for human detritus over at the SEC going to do a comparable probe? Oh wait, they are watching kiddy and tranny porn as we speak, and counting their Wall Street salaries once they leave their cushy taxpayer subsidized offices. Sorry, go back to demanding an increase in your budget you worthless examples of reverse evolution. In the meantime, we present some obvious block manipulation data in the SPY which if we had anything remotely resembling a market regulator would be immediately probed. Maybe the FSA can LBO the SEC? Surely Goldman can provide financing.

We have closely tracked the Q4 bank influx into the SPY ETF, which on ever declining volume breadth has become the one most dominant market determining factor, on both a push and a pull basis. It is no surprise that in February the SPY was once again, by a wide margin, the biggest source of capital inflows in the equity ETF space. As the chart below from Invesco demonstrates, institutions that still have remaining cash, ploughed over $1.5 billion into the SPY, which now has over $70 billion in net assets. Ironically this occurs as on a YTD basis US Market Cap-related ETFs have seen over $14.5 billion in net outflows, as virtually all equity ETF exposure has been broadly shunned.

At 112.8 million shares traded, the SPY just recorded its lowest volume day for 2010. One of the possible reasons for this: mutual funds are rapidly running out of cash to buy stocks. As Bloomberg notes, "equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow. Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg."

We have long observed the recent tendency for the EURJPY to track the SPY almost identically on an intraday basis. Today, this relationship is no exception. To be sure, some correlation traders have over the past several months picked up on this trend and use it with a higher R2 than any other corr. The keyword here, however, is recently. What has caught our attention is a long-term chart of the EURJPY, which today tumbled to levels last seen in February 2009. A long-term correlation convergence implies that either the EURJPY will bounce to 145 or the SPY will tumble 40% lower to 75. Most likely outcome: the two meet somewhere in between, which is why we believe a EURJPY/SPY convergence trade is very attractive here.

Over the past 6 months, much attention has been focused on broker/dealer trading in ETFs, and more specifically, on the SPDR S&P 500 ETF, better known as SPY, which in the absence of material cash volume in intrinsic names, has become the de facto primary way to express a bullish and, to a much smaller degree, bearish bias on stocks. Previous observations by Zero Hedge and elsewhere have demonstrated odd accumulation behavior by major broker-dealers which have been speculated to use precisely this ETF, in order to "push" the market in one direction or another. Having done some micro-level research previously, we decided to analyse SPY patterns from a macro stand point. After compiling SPY holder data for the just completed Q4 2009 quarter, we have observed some very curious trends in SPY accumulation. To wit: in Q4, the 5 major market players saw a dramatic increase in their SPY $ notional holdings: specifically JP Morgan (combining both Asset Management and Private Wealth) jumped by 222%, Goldman Sachs saw a 45% increase, Merrill Lynch SPY holdings increased by 207%, and those of Deutsche Bank: by 256%. During this time Morgan Stanley was relatively flat, while probably the biggest surprise was Credit Suisse, whose holdings dropped by 48%, or nearly 24 million SPY shares, to 26 million in Q4. Keep in mind Credit Suisse had a record 2009 holding of 109 million SPY shares on June 30, 2009: it appears Credit Suisse ETF desk has decided to aggressively offload as many SPY shares as it possible can beginning in Q3, 2009. Altogether, we observe a decidedlypositive correlation between B/D SPY holdings and the performance of the broader market.

I am growing more and more tired of seeing what appears to be a very "helpful" algorithm running in the SPY. I am using the term "helpful" very lightly. I relate this algorithm to a jumper cable, your car will run once you get the jump if your battery is running low right?

Now lets say volume in our market is equivalent to a discharged but not quiet a dead battery yet. Symptoms of the market being a "dead battery" are sluggish movement through key pivot levels on a daily 1 min chart, along with violent price spikes within the 1 min candle.

So how do we fix a market which does not have the Umph it needs to stay liquid and trade while not remaining flat all day after the initial 30 min opening volatility? A quant algo of course!

Recently, the Pragmatic Capitalist questioned who the mysterious large buyer of eMini S&P 500 futures (ES) was, when there has not been a corresponding large buyer of SPY ETF shares over the same short periods. We decided this warranted a further investigation to assess whether it is SPY or the ES that has historically had the greatest impact on the S&P 500 cash index. The results were surprising.

The sense of market urgency can be seen when comparing yesterday's and today's market volume. All of yesterday's SPY volume was surpassed by 1:30pm. Today's key support level is 105.59 which is the September 31 closing price, and which has already been taken out: the next support is 104 (which was tested once already), with 102 next below it.