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Danny Riley, Marlin Cobb

Early morning hockey rinks and bad coffee were the weekend drill, and at the time I didn’t realize that it was one of the best phases of my life. I love my boys very much, but we didn’t have a Bobby Orr or Mario Lemieux and their careers were pretty much over by high school, but their love of the game continues as a thread in the family. If you have had kids playing hockey you might already know that age levels are very cleverly named by small things ... the age levels were mite, squirt, peewee, bantam, midget. So when someone said their kids played peewee you had to try and think if a peewee was bigger than a bantam or not. I never could get it straight, particularly at 5 a.m. on a 10-degree Saturday morning.

During those mite and squirt years (ages 7-10) these hockey warriors’ spirits were so precious that there was a mercy rule for their games. On the scoreboard there was never allowed to be a differential of more than 5 goals showing. That means those games, and there were many, that had scores of 20 to 0 were shown as 5 to 0. It drove me nuts and it made no sense that in practice you were teaching these kids how to steal pucks, check without checking, but somehow they could not face the reality of a blowout game or the lesson of how to deal with it. They happen. My kids grew up in the culture of “you can be anything you want when you grow up” and “you deserve it,” and hiding the actual score was a part of that ... discouragement was not allowed.

Despite our overzealous parenting, they have survived and have come to grips that they can’t be anything -- they watch hockey -- and that they deserve what they work for and can achieve and nothing more. This is a long rambling story that I am desperately trying to bring around to the twenty-to-nothing blowout by the bulls and the psychology of the bears “dealing with it” and their discouragement. There is no score hiding in the markets -- either your balance is up or it is not. I am currently caught in my second swing short that I have teed up with the intention of swinging for the fences, I am close to stopping that one out should we run above 1570 on the ES June contract. That could happen today and here is why:

NH-NL 4-3-13

These damn New Highs. This is the new high/new low ratio and produces a trending signal when it get near that 90 area and just chatters, that is, it makes small moves up and down in that area. That is classic trending and it continues all through my short. This indicator can fall apart fast and for me it needs to happen fast.

Now let me show a chart that shows this market is losing just a bit of its mojo and that the bears just might be getting their first goal.

The Russell 2000 index is making a 15-day low while the S&P is making new highs. That is a risk-off divergence as money comes out of the riskier small caps and flows into less risky equities or bonds (TLT is at 118 area) or cash. This move is created when we sell the Russell 2000 and buy the Dow and S&P 500. That is happening now.

Russell vs SPY 4-3-13

I need to throw in a warning before you go out and put on that short. These risk-on / risk-off rotations can hit a stride that has perfect timing, like an eight-cylinder engine. That is, while the Russell corrects, the S&P will run ... once the Russell has sold off enough, the spark will ignite a small-cap rally, allowing the S&P to correct a bit, and then technology, and then ... you get it. We go up forever with the clumsy market engine firing in time.

So, be aware that there is a stealth flight to safety under way but that the market isn’t broken until the remaining buyers stop pushing stocks to new highs at their current pace. We need to see that NH/NL chart break down before we believe there is weakness beyond a 1% pullback repair.

Until then, realize that the real score is more than 5-0 and that the bears don’t deserve it ... they need to work for it.

Marlin Cobb, aka RedLionTrader, has been trading for over 10 years. Using his engineering background, Marlin has focused on extracting market timing signals from market breadth data, and most recently, on high-frequency trading and looking for pockets in the real-time market auction for possible exhaustion and turning points.

Our view: Funny how this works, but the MrTopStep daily closing stats have worked like a charm. We said buy Monday’s weakness and hold into Tuesday and that’s exactly how it worked. Wednesday stats are friendly too, with 10 of the first 13 closing higher with an average gain of up +7.90 handles and an average loss of -10.36 handles. We lean to selling the early rally and then looking to buy weaknesses. As always, keep an eye on the 10-handle rule and please use stops.

  • It’s 7:00 a.m. and the ESM is up 1.75 handles at 1566.25; crude is down 48 cents at 96.71; and the euro is up 12 pips at 1.2834.
  • In Asia, 6 out of 11 markets closed higher (Nikkei +2.79%, Shanghai Comp. +0.07%, Hang Seng -0.06%, ASX -0.56%).
  • In Europe, 6 out of 10 markets are trading lower (CAC -0.41%, DAX -0.07%).
  • Today’s headline: “Bonds Steady in Asia, Investors Await Jobs Data”
  • Total volume: 1.6mil ESM and 6k SPM traded
  • Fair value: S&P +1.00, NASDAQ +1.18
  • Economic calendar: MBA purchase apps, ADP report, ISM non-mfg index, API, John Williams speaks, James Bullard speaks

MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-4-2-2013

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.
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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities.