Well, that was fun. Just when I was wondering if investors had abdicated all decision making to bullish algos, they woke up and decided that things are a little more complicated than market conditions have been indicating.
Powell says the economy is so great that rates can continue to rise. This is clearly a double-edged sword, as the 10Y has aptly demonstrated. Members will remember the flattening of the yield curve poses little threat to stocks. It’s the rapid steepening that does the damage.
And, those who took an economics class or two (or even elementary algebra) can see that a continuing increase in interest rates poses serious problems for this “wonderful” economy of ours. The tiny increase we’ve seen to date (the black line below) has contributed to a massive increase in interest expense. Something has to give.SPX reached our initial target with ease yesterday, bounced for an hour or so, then tumbled to within 12 points of our next downside target before the obligatory last-minute recovery.
This is where things get interesting. Because, while a tag of the SMA50 and backtest of the January highs would make perfect chart sense, it would mean VIX breaking out of the falling channel it’s been in for months.
While I was wondering whether TPTB would allow such a thing, the employment figures came out and we got one of those trademark VIX plunges we’ve all come to expect. The message of such a shot across the bow is clear: it can go lower, a lot lower. Be careful.
This leaves us in a bit of a quandary. Was yesterday’s plunge close enough, in which case the more aggressive channel is in play? Or, should we expect more fireworks today? If VIX finally breaks out, things could get ugly.
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