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28Aug2015 Market Close: Small Caps Close Up Nicely, Large Caps Close Down Or Near The Unchanged Line, WTI Oil Stalled At The $45 Price Range

Written by Gary

U.S. averages closed higher while the large caps closed near the unchanged line. Ex-PBoC Adviser Li Daokui recently remarked, 'China stock market showed 'healthy' price adjustment'. Other noted analysts have noted that China government financial measures haven't been effective. Oil climbed to the mid 45's and then traded lightly sideways. I guess the oil glut has disappeared and we can all go home never to see low prices again - ha!

Earlier, Fed's Lockhart says he expects the 3Q growth to be slower than 2Q. In almost the same breath he reveals, Inflation will be affected by oil, currencies; performance of US economy "quite solid". What are these guy's smoking?

Todays S&P 500 Chart

Yesterday's rip in oil was violent, and indicative of a market saturated with short sellers. Sure, there was some bargain buying going on, but massive rips in bear markets to the tune of 10% are fueled by 'Johnny-come-lately' bears looking for a free lunch. The rally snapped a two month long downtrend line, and barring a major sell-off today, a ten week losing streak as well.

The Market in Perspective

Here are the headlines moving the markets.

The psychology behind financial market swings: A Q&A with Wall Street's top psychiatrist

NEW YORK (AP) — When it seems like the stock market has lost its mind, big banks and investment firms often turn to one particular psychiatrist: Richard Peterson, CEO of MarketPsych, a firm that applies research from behavioral science to financial markets.

MarketPsych's computer programs attempt to gauge the market's mood by scanning news and Twitter and other social media. The data feed it sells to traders sifts through more than 3 million articles each day, registering confusion, optimism and fear.

Last month, Peterson warned his investor clients that they were in for a rough ride and probably "a real correction" later in the summer. "Fear is creeping in," he said. In an interview with The Associated Press, Peterson fielded some questions about the recent market volatility.


Crude Oil Sticks It to the Shorts, Reason to Believe More Upside to Follow

Whether or not the fundamentals become supportive of higher prices, markets ebb and flow within the confines of larger macro-themed trends. So, while the supply/demand concerns which have kept the commodity pointed squarely lower may remain, the price extension lower and dour sentiment are due for a correction, at the least.

The low of the week comes near an under-side trend-line running back under the January and March lows. The weekly reversal bar off that line adds validity to it as a reliable sloping support level.

What we will watch for next is another change in character; bounces have quickly been sold, will this one hold? Ideally, a period of consolidation takes place over the next 1-3 days - something which has not happened following a bounce over the past two months.

If this can happen, I suspect the news-flow will become supportive or at least not adverse to price advancement. Watching how crude reacts to headlines will be key. If a rally is to begin, then bullish news will be bought aggressively, while bearish news will be shrugged off for the most part.

Until further developments, we will observe and should price action align with our interest then we will be ready to take action.


US oil prices rise another 6 percent after 10-percent surge on Thursday

NEW YORK (AP) — Oil prices surged again Friday, a day after recording their biggest gain in more than six years. U.S. crude rose 6.3 percent to finish at $45.22 per barrel after climbing 10.3 percent on Thursday. That was the biggest one-day gain for U.S. oil since March 2009.

The price of U.S. crude is still down 15 percent in 2015. Brent crude, a benchmark for international oils imported by U.S. refineries, rose 5.2 percent to $50.05 a barrel. Brent also rose 10.3 percent Thursday. U.S. oil had fallen to a 6 ½ year low on Monday because of a global supply glut and worries about the health of China's economy.

Wall Street a little lower in calm after the storm

(Reuters) - Wall Street was moderately lower on Friday afternoon after comments by a top Federal Reserve official suggested that a September rate rise was more likely than some investors expected.

Explaining The Stock Market Rebound In 1 Simple Chart

Many were stunned at the pace of the v-shaped recovery in US equity markets this week after Monday and Tuesday's carnage. However, as the following chart makes very clear, there was good reason for it... Having overshot to the downside of "Fed-Balance-Sheet-Implied" levels but around 100 S&P points, the broad index ripped back higher to almost perfectly settle at "Fed Fair Value" - between 1980 and 2000. But, there is a rather ominous event occuring in 2016 that is out of The Fed's control that implies S&P 1,800 unless QE4 is unleashed.

Fed balance sheet implies an S&P level around 1990...

What happens next? Well, Scotiabank's Guy Haselmann has some thoughts...

The Fed's balance sheet has $400 billion of maturities to deal with in early 2016 which the market place is not paying enough attention to.

I believe the Fed will want to allow as much of this as possible to roll off (i.e. the balance sheet will shrink). The decline in the Feds balance sheet is a defacto tightening.

The Fed may be reluctant to do both, i.e. hike, while also allowing the balance sheet to shrink too quickly. They could hike and do some re-investment, but it may be strange re-invest a large portion at the same time that they are hiking.

How Investors Respond To A Market Crash

By Nicholas Colas of Convergex

Tell 'Em That It's Human Nature

The surge in volatility over the past week enabled this year's aggregate number of plus or minus 1% moves in the S&P 500 â€" currently 40 â€" to exceed last year's total of 38. There were nineteen positive 1% or more days in 2014, and 19 negative days compared to 22 up days and 18 down days this year. We need 14 more 1% days in order to reach the annual average of 54 since 1958, representing only 16% of the next 86 trading days left in the year.

As we progress throughout the balance of 2015, we expect to encounter more of the volatility of the past week than the past few years. One percent or more days tend to pick up by the fifth or sixth year of bull markets such as the rallies of the 1980s, 1990s, and 2000s, and we are in our seventh. Additionally, the VIX often hits its annual peak in October â€" for example last year â€" more so than any other month with a total of 5 since 1990. December may statistically register as the quietist month with 7 annual troughs over the past 25 years, but this year may prove different due to the uncertainty surrounding the Federal Reserve's timing of an interest rate hike.

What do you think moved financial markets over the past week of turbulent trading? Perhaps slowing growth and unstable equities in China, renewed fears of deflation, the impending rate hike by the Federal Reserve, or all of the above. Each example certainly played a role. One underappreciated culprit irrespective of economic fundamentals, however, lends itself to volatile capital market environments: investor psychology.

In the midst of turmoil among asset classes, investors tend to make irrational decisions, such as panicking and liquidating at inopportune times. Nobel Prize-winning Psychologist Daniel Kahneman helps explain ill-conceived reactions to the market with his concept of loss aversion ...

Pentagon teams up with Apple, Boeing to develop wearable tech

MOUNTAIN VIEW, Calif. (Reuters) - U.S. Defense Secretary Ash Carter awarded $75 million on Friday to help a consortium of high-tech firms and researchers develop electronic systems packed with sensors flexible enough to be worn by soldiers or molded onto the skin of a plane.

The Greatest Con Job In Central Banking History

One of the greatest con jobs in history was convincing ordinary people that Central Bankers care about the "economy" or Main Street.

Aside from the complete lack of relevance that Main Street has for Central Bankers from a professional perspective (more on this in a moment), when do you think was the last time that Janet Yellen or her ilk spent an evening with non-banker/financial types? Years ago? Decades ago?

Yellen lives in a super-affluent, gated part of Washington DC. And even within that subset of the US population she lives in a higher echelon: her entourage of security annoys her wealthy neighbors... though I suspect part of the annoyance stems from jealousy.

Regard professional significance... why would Janet Yellen care about ordinary people? They're just data points in her financial models. Ordinary people didn't place her at the Fed (the big banks did). And they didn't place her as Fed Chair (the financial/ political elite did... with the express intent of gaining future favors).

Think of it this way... imagine there was a super cartel of English Professors who controlled what words you or I could use in daily conversation. These individuals literally could change the structure of the human language if they wanted... removing words or adding words at random.

Now imagine that they randomly pick out a low level English Professor who they elevate to being the face of their organization. Do you think this professor would give a damn about how her decisions/ words affected speech? She literally was made one of the most powerful people in the world by this cartel.

This is case worldwide. Most Central Bankers came up from the Too Big To Fails or Primary Dealers (or they are academics like Yellen or Bane ...

Is This The Most Important Chart In Global Finance?

First, we present the chart, followed by some brief color and analysis.

Over the past two weeks, the world has begun to understand that, as Citi recently put it, EM FX reserve drawdowns do not "happen in a vacuum." That is, when emerging economies are forced to liquidate billions in USD assets to offset capital outflows, defend their currencies, and/or plug yawning budget holes, it puts pressure on those assets and works at cross purposes with the expansion of the Fed's balance sheet.

This dynamic is unfolding rapidly at present across EM. It began last November with the quiet death of the petrodollar and has now culminated with the liquidation of more than $100 billion in USTs by China during the last two weeks of August. The story, reduced to its simplest possible form is as follows. Saudi Arabia's move to keep crude prices depressed in an effort to bankrupt the US shale space and tighten the screws on Moscow exacerbated a commodities downturn, sparking capital outflows from EM assets and pressuring EM currencies. In this environment, the yuan's REER appreciated to the tune of 15% thanks to the RMB dollar peg, a situation which ultimately proved to be untenable for China amid decelerating economic growth. Apparently failing to realize that, as SocGen notes, the only way to have a stable currency is to either exercise absolute control or no con ...

Fed hawks acknowledge market turmoil may delay rate hike

JACKSON HOLE, Wyo. (Reuters) - Federal Reserve officials who are most anxious to hike interest rates said on Friday that continued turmoil in financial markets may cause the central bank to delay tightening monetary policy beyond next month, even though the U.S. economy remains strong.

When The Yen Was A Last Resort Safety Bid, You Know It Was Bad

Submitted by Jeffrey Snider via Alhambra Investment Partners,

It looks like the reversal of Monday's dramatic and frightful liquidation has held and gained in the past few days. From that we can infer, of only the near-term, that those forced repositions were enough to square the liquidity imbalance from the latest "dollar" run. The two words are related not just in a common semantic root, as liquidations are the necessary condition of illiquidity where base financial conditions are detrimentally misaligned.

Every panic that has ever existed is in one form or another a systemic of near-systemic liquidation of financial positions in favor of present claims in the face of indiscriminately redirected basis (typically implosive). Even wholesale "supply" complications don't change that but only perhaps enhance the instability of the reversions since there is no obvious and clear mechanical means (what is being converted to what?

We know what is being redirected as a result, but that is derivative to the actual seeds of disruption deep within the aggregate eurodollar inner workings) to interpret the size and reach of the reversal.

The difference between such a liquidity "event" and full-blown crash is simply one of magnitude on both sides: gaping liquidity supply which forces disorderly, widespread and momentous squaring to some greatly diminished settled state. The relative degree of chaos is just the last resort method of that realignment.

VIX ETF Short Squeezes For 6th Day In A Row, Long-Dated Vol Above Monday's Peak

While all eyes are on the front-end of the VIX term structure, today's volatility term structure in the out-dates is now higher than they were at the close on Monday at "peak crisis." VXX - the VIX ETF - is still surging, as the massive short position continues to get squeezed amid the ongoing backwardation in VIX...

6th day of short squeeze in a row... It sems picking up pennies in front of the steam roller does have consequences...

And VIX is now higher than in it was during Monday's crisis in the out-months...

This is the longest period of sustained bakcwardation since 2011...

and The skew (cost of downside tail risk vs 'normal' risk) is extreme...

Why QE4 Is Inevitable

One narrative we've pushed quite hard this week is the idea that China's persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week's posts hardly represent the first time we've touched on the issue of FX reserve liquidation and its implications for global finance. Here, for those curious, are links to previous discussions:

China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium

China's Record Dumping Of US Treasuries Leaves Goldman Speechless

How The Petrodollar Quietly Died And Nobody Noticed

Why It Really All Comes Down To The Death Of The Petrodollar

Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks

What China's Treasury Liquidation Means: $1 Trillion QE In Reverse

Stanley Fischer Says Fed on the Fence for September Move

The Federal Reserve's No. 2 official, Stanley Fischer, told CNBC the central bank hasn't settled on whether to raise interest rates next month, and the option remains on the table.

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