TheSlayer's Market Thoughts

Today's Market Action

June 13, 2013 was a disappointing end of the week for Bulls.

SPY June 14 2013

Many no doubt felt that the Thursday June 13 2013 rebound would extend into today's session. We didn't think that at all, it didn't, and the E-Mini futures never seriously approached 1640 during today's session. The one determined push higher during the morning chaos stalled out at 1635 on the futures and quickly reversed. The market internals just weren't there for a sustained push higher. Anybody who bought into that Bull Trap lost money. The rest of the day was spent in a choppy mess with a decidedly downward bias. The futures closed toward the lows and dropped a little bit more after the close.

Technical Factors

The downward trend that we had such difficulty seeing at first is now pretty clear. The downward trend channel seems to fit what has been happening recently. If the market were still in Bullish mode, that would be extremely unlikely: the channel easily would be breached to the upside, and the market advance would resume.

After all the to-and-froing since the breakout over 1600 in early May, we finally may be reaching a turning point in this market. SPY is getting squeezed because it is respecting the recent intermediate-term downtrend channel but also the long-term uptrend channel. There simply is not a lot of room left - one has to give. The 50-day moving average, which has been SPY's bedrock level of support over the course of this rally, also is rising fast and no longer gives the market much wriggle room. A fall to 1600 now would be significantly below the 50-day MA, breaching that key support.

So, either SPY breaks higher, or it loses contact with its main reference points of the current long-term uptrend. Flip a coin to decide, but the recent action in the market suggests more volatility is in store. Judging from today's action alone, the failure to push past 1640, the aimless chop throughout the day and the close toward the lows suggest a weak market.

Today's false breakout higher was like a trip down memory lane because it resembled the actions of a normal "two-way" market. That's why so many of us are frustrated by this market - we expect those breakdowns and automatically fear them, but instead, for the past few months, those runs higher mysteriously have continued all day. Well, this one didn't, and that is the most ominous portent of all for the Bulls. The last thing they want is a return to the normal rules of the market, because that spells trouble for endless rallies.

What is Going On Behind the Scenes?

One recent fundamental factor has caught our eye. It may mean nothing, but it also may be a clue as to why the market finally is softening. The upward rise in mortgage rates recently suggests something has changed in that market. With all the meddling that Bernanke has had the Fed doing in that area, the suspicion arises that the Fed may not be pumping quite as much money into the markets as it had been, or perhaps it has changed its focus. That is a tricky technical issue that someone with clearer insight into that area might shrug off and say, "Bah, that has nothing to do with anything." Perhaps. But when something fundamental like that changes, it is of interest.

Would the Fed taper without telling us? Why, that would be - just like the secretive Fed. And it also would be in complete accordance with what Chairman Bernanke has been saying all along, that the Fed will adjust the size of its QE as it deems conditions warrant without having to notify anyone (meaning, it arbitrarily and capriciously will determine when the equities markets shall rise and fall). The unemployment rate has fallen over the course of the past year, though not to the target of 6.5%, and that may be justification enough in the Fed's eyes for a little easing on the QE gas pedal.

USD/JPY and the US Markets

Another factor is very curious and troubling.

USD/JPY compared with SPX, June 13 2013

Sometimes, relationships between different financial instruments develop, and then. just as mysteriously, they no longer correlate. There was a time a couple of years ago, for example, when the relationship between the Euro and the Dollar (EUR/USD) was all-important. That ended when the European financial crisis cooled off. The pros are always looking for these relationships as market tells, and they don't care what the underlying factors are. There are reasons for tight correlations, make no mistake about that, but those reasons simply don't matter when you are trading off of them.

The above chart compares SPX (proxy for the S&P 500) and USD/JPY (the dollar/yen ratio). Note how closely the two have been correlated during this year's rally. The current uptrend began in November 2012, right when the tight USD/JPY correlation began. The Yen suddenly took off on its own in late May, though, which, if the correlation had remained intact, should have led to a decline in the SPY about as precipitous as what has occurred in the Nikkei 225. While that didn't happen, it was when the US markets suddenly lost their upward mojo.

Over the past week or so, as the Yen skyrocketed versus the dollar, the S&P 500 has refused to be pulled lower in conjunction with the USD/JPY. It also is true that SPY hasn't been as strong as it was before then, either. Note that this collapse of the dollar also ties in nicely with the recent decline in the Nikkei. Why is the SPY special, that it can track the USD/JPY so closely for so long, and then just shed it like a bad habit when the relationship is no longer Bullish? Who knows. SPY may just be taking its time in following the USD/JPY lower, or SPY simply may have stopped tracking the USD/JPY for unknown reasons.

Not all is terrible if the USD/JPY correlation with the SPY resumes, despite the recent plunge in the USD/JPY. Many think the Yen is overbought (due to technical factors) and due to weaken again. There has been the curious spectacle this week of a flood of predictions from the likes of Goldman Sachs about how the Nikkei 225 will see 17000 by year's end, a rise of about a third from current levels.

Why are we suddenly seeing all these (renewed) rosy predictions for the Nikkei 225? Here's my theory. The Japanese markets have risen when the Yen fell, because that helps their export industries (it also hurts them due to higher cost of imports, but the overall effect is likely positive for Japanese exporters). If the brokers are right, or anywhere near right, about the Nikkei going through the roof, that implies that the Yen will crash. Look again at that chart above - if the Yen crashes, the USD/JPY goes up, and SPY will resume its advance. Despite the possibility of a looming downturn in SPY if SPY continues mirroring the USD/JPY, Bulls may be quite happy if that relationship remains intact through the end of 2013.

Conclusion

We retain our Bearish stance (leaning short) until and unless SPY makes a strong and sustained move above 1640. A close below 1600 spells real trouble for this market - and that is only about 20 points below us. Naturally, we closed today almost precisely in the middle between those two key levels.