SPX was locked in a nice, neat falling channel last week until Friday morning when, after backtesting the top of our yellow channel for the eleventy billionth time, two fairly common things happened: a rising channel for VIX suddenly broke down… …and, USDJPY “broke out” of the falling channel it’s been in since Dec 8. The result: SPX broke out of its falling channel (the yellow arrow):It doesn’t matter that VIX might not establish new all-time lows, or that USDJPY’s breakout might very well be another head fake.
The only thing that matters is that SPX will have broken out of a falling channel and successfully backtested a rising channel — in other words, its “breakout” is intact.
Thus, the divergence between real economic activity and stock prices will widen just a little bit more this morning. Bottom line: fundamentals continue to take a back seat to algos which — together with passive investing and other machine trading approaches — now account for 90% of all trading volume.
As long as central banks control the primary inputs to the most powerful algos, fundamentals will matter less and less.
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