NO MORE NASDAQS

The NASDAQ has given up all of its gains and gone negative for the session. This is the very worst case scenario for stocks, one that is sure to spill over into tomorrow’s opening trade.

I’ve been talking about the bad breadth since this morning. Right now, it’s abysmal at 65%.

If you want the market to rally, you’re gonna need breadth upwards of 80%, with crude oil participation.

The downward pressure is the result of margin call liquidations not being met with natural buyers. Institutions and hedge funds most likely entered 2016 with a full slate of investments and little cash. Considering the fact that 25% of stocks are down 20% or more for the year, I’m guessing overexposed managers will use rallies like this to reduce exposure. This rally won’t stick unless managers grow a set of balls.

If the NASDAQ regains its swagger by the day’s end, I will consider this day to be a fine exhibition in resiliency.

Fear can turn into greed overnight, as is the case with crude today. Both. WTI and Brent are skybound, unhinged from the shackles that constrained it yesterday.

Aside from the Fed, the most important aspect to this market is crude. Cramer seems to have fits over this correlation with the market. He believes stocks should trade up with lower crude: utter horseshit. We’ve seen over the past year there isn’t any ancillary benefits from cheaper crude. People aren’t eating out more or buying more crap from the mall. They are, however, playing more lotto.

Here we are, rip roaring higher today. Very encouraging. There are big buyers for $40 crude contracts, as people are trying to grab delta before the price gets rolling and the options explode in price.

This week has seen a flurry of buying of derivatives that give their holder the right to sell at $30 a barrel as far out as December, suggesting that traders and investors are growing increasingly gloomy about the prospects of price recovery.
But outstripping the increase in holdings of $30 so-called “put” options, is the rise in buy, or “call” options at $40 a barrel, which would suggest that traders believe that by December this year, oil at $40 will look like a bargain.

Data from the InterContinental Exchange (ICE) shows holdings of $40 call options for December this year leapt overnight to the equivalent of 27.92 million barrels of oil, making it the second-largest strike for options maturing that month.

The rout that has stripped 30 percent off the price of oil in the last 13 trading days alone has sent equity markets into a tailspin and gave rise to the now-famous “sell (mostly) everything” note by UK investment bank RBS last week.

“With the current volatility, trying to catch a bottom in crude oil on prompt futures has more than a $3 a barrel risk and a contango roll depreciation, but with Brent December 2016 falling below $35, the cost of buying a Brent December 16 $40.00 call has fallen down to $3.60 a barrel,” Olivier Jakob, an analyst a Swiss-based consultant Petromatrix said.

“The Brent December 2017 $50.00 call is at $4.00 a barrel. Given the apparent signs of production stress at the current price levels we see the value in holding the longer-dated call options in crude oil at relatively low strike levels,” he added.

Reflecting Petromatrix’s point, open interest in December calls at $40 now outstrips that of March puts at $30 by a ratio of nearly three to one, based on the ICE data.

Over the last week, open interest in $30 puts in fact fallen by about 20 percent, while in those December $40 calls, it has grown sixfold.

“It’s been the trend of every melt down to buy upside calls before they get too expensive to get some delta when the market turns,” one said.

Market breadth is still in the mid 70’s, not too impressive. However, the rally in crude is very impressive. My money is on a gorilla raping rally through next week.

The market needs to hold these gains, else margin calls will crush any hope by the end of day. The rally in crude, albeit tepid, is encouraging. However, I wouldn’t be surprised to see oil lower and stocks higher, decoupling from the commodity.

Bearishness is at record highs and we all have reasons to sell our stocks. For the year, I am down about 5%, fully invested in SPY and TLT. I did sell 1/6th of my SPY position this morning and I detailed my plans inside Exodus for members to take in.

News is meaningless right now. All the matters are animal spirits. Do investors want it or will they cower into the afternoon trading hours again?

Breadth is only at 73%, so that’s not encouraging. But we are so oversold, people are so desperate for a rally, I’d be surprised if the muppet masters didn’t throw everything but the kitchen sink at this market–trying to light a fire under this market.

Longer term, banks, tech and energy are impaired, all for different reasons. Take the rally and use it to reduce your exposure.

Jeff Gundlach aka ‘the new Bill Gross’ is giving it to the Fed for prematurely hiking rates, as he was one of their most vocal critiques. He suggested the recent sell off as having the trappings of liquidation or margin call selling and then pointed to oil as a result of a ZIRP policy gone awry, coupled with global weakness.

Oil is in massive oversupply due to ZIRP (zero interest-rate policy) induced over-investment,” he said. “And crashing oil is not the cause of all this chaos, it is a symptom of global economic weakness. As are all the tumbling risk markets. We have insufficient and dwindling global growth.”

Gundlach, who had repeatedly warned that the Fed prematurely raised rates in December, said: “The market is going to humiliate the Fed.”

Gundlach said Fed officials need to soften their rhetoric on hiking rates further. He said he does not think the Fed will be able to raise interest rates eight times over the next two years, as reflected in its ‘dot plot.’

For those unfamiliar with the inane ‘dot plot’: it is a psychotic plan by Janet Yellen, probably conjured up in a NYC deli, where the Fed would hike interest rates 16 times over the next 3 years. Really, it’s clownishly funny, especially when considering how the market faired with just 1 hike.

The BOJ threw a wet towel on future stimulus tonight. As such, asian markets reversed early gains and fucking plunged through the bamboo floorboards.

Risk, for lack of a better word, is off. Japanese stocks are vacillating between egregious and mammoth losses, anywhere from 2-3%. Hong Kong is down 250 points, now below their “NAV”. The last time it was breached was during the Asian contagion crisis of 1998.

U.S. futures have reversed earlier gains of +130 and are now lower by 50.

Richard Iley, from BNP Paribas, makes the case that the recent foray into the pits of hell is about the Fed– and not China. His position is clear: the Fed is the de-facto central bank for the world– and although US employment is near capacity; the world was not ready for Fed tightening, which essentially sucked liquidity out and crushed emerging markets, currencies, and commodities wholly to little bits and pieces– and then flushed them down Janet Yellen’s toilet bowl.

Anyone still want to take the other side of this argument? I didn’t think so.

Yellen and Dudley must feel like supreme assholes right now, while Dr. Benjamin Bernanke is lampin’ in his decked out corner office at Citadel, making “Miss me Yet” memes on reddit.

Last year, the great walled nation of China had over $4 trill in fx reserves aka cash for a rainy day. Due to their economic slow-down and capital flight, they’ve been spending it like drunken sailors. By next year, that number is predicted to be as low as $2.6 trillion.

News is out tonight that the PBOC injected an astounding $315 billion–which qualifies as the largest open market cash injection in three years.

Before you know it, all of their money will be gone. Poof. Easy come, easy go.

At least they got to spend a whole bunch of money on ghost cities and expensive as fuck oil for their strategic reserves.

Asshats.

That’s 12 days for you home gamers.

According to Exodus, out of 4,277 stocks in the data base, 1,078 of them are down 20% or more. There are 447 stocks down more than 30% for the year, more than 10%. These are appalling numbers, stats that should shame the Federal Reserve for helping to create an environment that made this possible.

The hardest hit sectors have been: Shipping (-33%), Electronic Stores (-31%), Oil and Gas exploration (-31%) and Nuclear (-29%).

Biotech, a long term favorite for momentum investors is down 23% for the year, and down 36% over the past six months.

Conversely, TLT is up 8.6% over the past six months, not including dividends.

The top performing sector has been water utilities, down 0.3%.

Bear market, lads.

This is a research note that was circulating today–that I didn’t get around to discussing–due to the face ripping market I was enjoying throughout the day.

The banks sold their clients structured products (God I hate that phrase) that gave them exposure to Chinese stocks traded in Hong Kong, aka “H-shares.” If you recall, everyone was sucking the skin off China’s knee caps just 1 year ago. Boy have circumstances changed.

Apparently, there is a “knock-in” feature that triggers if the H-shares fall below 8,000, with a notional value of $13.6 billion and another $16.8 billion between 6,000-7,000.

Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan. Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said.

“As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.”

Guess where the H-shares are trading now?

Pray for a rally.

Obama’s good friends, the Iranians, are back to selling their crude on the world markets again, much to the chagrin of our other dear friends, the masterminds behind 9/11, the Sauds.

Cramer posits that Iran is offering extreme discounts to recapture market share, which is exacerbating the crisis. Furthermore, short sellers are using the deleterious events in the oil patch to start targeting banks who have lent money to the industry.

OPEC is a thing of the past. Free markets, and desperate men, are destroying value in the oil patch. The sort of selling we’re seeing is reminiscent of past bubbles– when they popped– and the margin call sellers who were forced out, as a result.